Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Asia Competition Barometer: Pharmaceuticals

1,920 views

Published on

Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009.

This report focuses on the Barometer findings for the pharmaceutical sector. Assessing a universe of over 350 pharmaceutical companies that are publicly listed in eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the pharmaceutical sector.

Other reports in this series look at the information technology services, precision engineering, transport and logistics, and petrochemicals and chemicals sectors in Asia.


Published in: Business, News & Politics
  • Be the first to comment

Asia Competition Barometer: Pharmaceuticals

  1. 1. Asia Competition BarometerPharmaceuticalsAn Economist Intelligence Unit reportSupported by
  2. 2. Asia Competition Barometer: Pharmaceuticals Contents Preface 2 Executive summary 3 Asia’s growing importance for corporate performance and global competitiveness 5 Competition and profitability at Asian firms 9 Competition: Marginal decrease in an extremely fragmented sector 9 Profitability: Slow growth 11 Case study: Glenmark Pharmaceuticals 13 Positioning for success in Asia 14 Sustained growth 14 Patent expirations will lead to more partnerships involving Asian generics manufacturers 15 Case Study: AstraZeneca 17 Case Study: Lonza 18 Outlook 19 Barometer methodology 21© The Economist Intelligence Unit Limited 2012 1
  3. 3. Asia Competition Barometer: Pharmaceuticals Preface Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009. This report focuses on the Barometer findings for the pharmaceutical sector. Assessing a universe of over 350 pharmaceutical companies that are publicly listed in eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the pharmaceutical sector. Other reports in this series look at the information technology services, precision engineering, transport and logistics, and petrochemicals and chemicals sectors in Asia. March 20122 © The Economist Intelligence Unit Limited 2012
  4. 4. Asia Competition Barometer: PharmaceuticalsExecutive summaryW hat does the emergence of Asia as a major engine of global economic growth mean for companies operating in the region? Asia’s robust economic outlook—coupled with diminished growthprospects in many other parts of the world—has attracted new investment into the market both fromregional players and Western multinationals (MNCs). As a result, competition in the region is expectedto intensify. Given the darkening global economic outlook, and the expected impact on some economiesand sectors in the region, growth and profitability look uncertain in the near term. But over the mediumto longer term, Asia’s strong economic fundamentals will ensure consistent growth across a range ofindustries. How are companies positioning themselves to capitalise on Asia’s growth opportunities overthe next few years? The Asia Competition Barometer assesses the intensity of competition and changing market dynamicsin several key sectors. This report examines the pharmaceutical sector, which includes the manufacture ofbasic pharmaceutical products and preparations, and the wholesaling of pharmaceutical goods. Among the key findings of this report are the following: • Asia’s pharmaceutical sector has been expanding rapidly, in line with the region’s strongeconomic growth and demographic changes. Several broad trends, including rising householdincomes, increased government expenditure on healthcare, higher life expectancies, consumer healthawareness, and the growing incidence of chronic developed-world diseases associated with changinglifestyles have all boosted demand for pharmaceutical products in the region. According to theEconomist Intelligence Unit (EIU), regional pharmaceutical sales have more than doubled from US$97bnin 2001 to US$214.2bn in 2010. By 2016, the EIU expects sales to hit US$386bn, reflecting an annualaverage growth rate of more than 13%.• The number of players, homegrown and global, is rising. The number and size of publicly-listed firmsin the pharmaceutical sector in Asia has increased dramatically. The total number of listed companies in© The Economist Intelligence Unit Limited 2012 3
  5. 5. Asia Competition Barometer: Pharmaceuticals the industry rose by 34% between 2004 and 2009, from 276 firms to 370. Total combined revenues nearly tripled from US$27.4bn to US$73bn during the same period. • Global companies are investing heavily in Asia across sales and marketing, R&D, and manufacturing. Global pharmaceutical firms have been moving into Asia to tap its burgeoning market, and to lower their production costs by shifting capacity from higher-cost countries to the region. Furthermore, while Asia was once viewed as an attractive destination only for simple outsourced production, the region is increasingly seen as a key R&D hub. • Despite a slight increase in market concentration, competition in Asia’s pharmaceutical sector remains fierce. Among publicly-listed Asian firms, the industry’s largest players increased their market share between 2004 and 2009. However, Asia’s pharmaceuticals market remains highly competitive and extremely fragmented, with thousands of smaller manufacturers. The biggest firms have been able to grow their market share partly through fierce price competition, as they enjoy scale efficiencies and lower distribution costs. Rising incomes in the region have also contributed to increased market share as more consumers can afford branded pharmaceuticals and elective treatments. Nevertheless, there will continue to be opportunities for small firms that can provide specific services, such as contract manufacturing or research work for larger companies. • Even though operating revenues almost tripled from 2004 to 2009, profitability has not increased dramatically due partly to increases in material costs and overall wages. For instance, the average cost of employees increased by 50% from US$6,000 to US$9,000 between 2004 and 2009. The 2008 global downturn did have an impact on profitability, but its effects were muted compared to many other industries. This is because products in many segments of the pharmaceutical market are considered necessities, and hence are somewhat recession-proof. • The end of patent protection for some blockbuster drugs is leading to more partnerships between generics manufacturers and big brand pharmaceutical firms. This year (2012) marks the steepest point of the so called patent cliff, when many blockbuster drugs come off patent, and many global pharmaceutical firms are looking to Asia to counter falling revenue streams. They are moving headcount from developed to emerging markets, including Asia, and making strategic acquisitions of generics manufacturers in order to diversify their business.4 © The Economist Intelligence Unit Limited 2012
  6. 6. Asia Competition Barometer: PharmaceuticalsAsia’s growing importance for corporateperformance and global competitivenessO ver the past decade, Asia has rapidly grown in importance to the global economy. Its share of global GDP, measured in purchasing-power parity terms, increased from 26.8% in 2001 to 33.8% in 2010.1By 2016, the Economist Intelligence Unit (EIU) expects this proportion to rise to 38.9%. 1 Asia here includes Bangladesh, China, Hong Kong, Indonesia, India, There are several broad trends that have been driving Asia’s pharmaceutical sector. The first trend is Japan, South Korea, Malaysia, Myanmar, Philippines,demographic change that is boosting market demand. Many Asian countries have been experiencing Pakistan, Singapore, Sri Lanka, Thailand, Taiwan, andrapid population growth. India’s population, for example, grew from 1.02bn in 2001 to 1.18bn in 2010. VietnamThe EIU expects it to reach 1.29bn by 2016 (see Figure 1). Population growth has been the result of not only high birth rates in some countries, but increasedlife expectancy in most countries (see Figure 2). On a related note, those Asian countries with low birthrates, such as China, Japan and Singapore, are now facing ageing populations, which presents growthopportunities for pharmaceutical companies making specialised drugs for diseases common among theelderly.Figure 1: Population(m) Asia China India Indonesia Japan4,0003,5003,0002,5002,0001,5001,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Source: BPS; China National Bureau of Statistics; EIU; US Bureau of Census© The Economist Intelligence Unit Limited 2012 5
  7. 7. Asia Competition Barometer: Pharmaceuticals Figure 2: Life expectancy (years) 2001 2016 100 80 60 40 20 0 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: US Bureau of Census; Economist Intelligence Unit These inter-related demographic factors—higher life expectancies, population growth, and the overall ageing of some populations—have together boosted demand for a variety of pharmaceutical products. The second trend is rising incomes, which are driving demand for better drugs and medications. Incomes have risen dramatically across Asia over the past ten years, in line with overall economic growth, boosting over–the-counter drug purchases. Moreover, about half of Asia’s population still lives in rural areas, but they too now have greater access to mainstream medicines because of widespread public and private sector efforts to broaden access to healthcare. Increasing affluence and educational standards in Asia are also raising general health awareness among consumers, further boosting drug sales. The third trend, which is driven in part by the second, is lifestyle change. As Asians have become richer, their diets and habits have evolved. For example they now eat more meat and drink more sweetened beverages. This has been accompanied by an increase in the incidence of so-called developed-world diseases, including cancer, diabetes and heart ailments. For example, China and India now have the2 Shaw et al, “Global world’s largest diabetic populations, with some 51m and 43m people respectively.2 Experts believe thatestimates of the prevalence ofdiabetes for 2010 and 2030”, the prevalence of diabetes in Asia will rise rapidly between now and 2030 (see Figure 3).Diabetes Research and Clinical Meanwhile, governments in the region have been investing in healthcare infrastructure and servicesPractice, Vol 87, Issue 1, Jan2010, pages 4-14 in order to alleviate the burden on households and to cope with changing disease profiles. Authorities in countries such as China, India and Indonesia have been trying to broaden basic health coverage through national insurance schemes. This combination of public and private spending has led to a steady rise in Figure 3: Diabetes prevalence (%) 2010 2030 15 12 9 6 3 0 Sri Lanka Malaysia S Korea Thailand India Australia Japan Philippines Taiwan Indonesia China Vietnam Source: Shaw et al, “Global estimates of the prevalence of diabetes for 2010 and 2030”, Diabetes Research and Clinical Practice, Vol 87, Issue 1, Jan 2010, pages 4-146 © The Economist Intelligence Unit Limited 2012
  8. 8. Asia Competition Barometer: Pharmaceuticalsper capita healthcare spending in the region (see Figure 4). This rising healthcare spending has benefited the pharmaceutical sector. According to the EIU, thepharmaceutical market has grown rapidly in Asia, with sales having more than doubled from US$97bn in2001 to US$214.2bn in 2010. By 2016, the EIU expects it to hit US$386bn, reflecting an annual averagegrowth rate of more than 13%.Figure 4: Healthcare spending(per head, US$) 2010 20303,0002,5002,0001,5001,000 500 0 China India Indonesia Malaysia Philippines Singapore Thailand VietnamNote: Total public and private expenditure on health, per capita.Source: Epsicom; WHO; EIU Asia has become increasingly important as a market for large global pharmaceutical companies.For example, in 2010 Asia accounted for 21% of global revenues at Bayer, a German chemical andpharmaceutical company, up from just 10% in 1990.3 3 Bayer corporate website Between 2004 and 2011, fDi Markets, a data provider, recorded 653 cross-border investment projectsin Asia from 321 companies in the pharmaceutical and biotechnology space, worth a total of US$28.6bn.Some 70% of these were in the pharmaceutical sector and the rest in biotechnology. China was the largestrecipient with 186 inward investments and was closely followed by India and Singapore with 157 and 94investments respectively. Global pharmaceutical firms have been moving into Asia to tap its burgeoning market, and to lowertheir production costs by shifting capacity from higher-cost countries to the region. The region is alsoincreasingly seen as a key R&D hub, given its low costs and huge talent pools. Of the 653 cross-borderpharmaceuticals and biotechnology investments that fDi Markets recorded in Asia from 2004-2011,R&D accounted for 200 projects (31%), compared to manufacturing with 175 (27%) and marketing andsupport with 168 (26%). British firm GlaxoSmithKline (GSK), Swiss company Novartis, and Germany’s Bayer led the investmentcharts over this period with 21, 16 and 13 projects respectively. These projects vary in scope. For instance,Novartis has invested heavily in biotechnology and drug discovery units in places such as Shanghai andSingapore. Among other things, Bayer has been investing in R&D for diseases, such as liver cancer, thathave a higher incidence in Asia. One of GSK’s recent investments is in a new call centre in Okinawa, Japan,where pharmacists will respond to requests from medical professionals as well as consumers.© The Economist Intelligence Unit Limited 2012 7
  9. 9. Asia Competition Barometer: Pharmaceuticals “Asia Pacific is now seen as the key growth opportunity in the short to medium term, and hence companies are increasing investment levels to capture that growth,” says Mark Mallon, regional vice president Asia Pacific and president China at AstraZeneca, a British biopharmaceutical firm.8 © The Economist Intelligence Unit Limited 2012
  10. 10. Asia Competition Barometer: PharmaceuticalsCompetition and profitability at Asian firmsT he number and size of publicly-listed firms in the pharmaceutical sector in Asia has increased dramatically. The number of listed companies increased 34% between 2004 and 2009, from 276 firmsto 370. Over the same period, the total combined revenue of publicly-listed pharmaceutical companiesalmost tripled from US$27.4bn to more than US$73bn.Competition: Marginal decrease in an extremely fragmentedsectorAsia’s pharmaceutical sector is extremely fragmented, with the presence of numerous smallermanufacturers. Just in India, for example, there are more than 10,000 pharmaceutical companies, mostof which are small. To capture the intensity of competition in the pharmaceutical sector in Asia, we have used theHerfindahl–Hirschman Index (HHI), which measures the market concentration of an industry’s largestfirms. HHI values can range from 0 (extremely fragmented market) to 1.0 (monopoly). Here we havemultiplied the values by 100 to achieve a scale consistent with profitability indicators (see below). TheHHI for Asia’s T&L industry increased from 1.54 in 2004 to 1.99 in 2009 (see Figure 5), signifying that the 4 A measure of the size of50 biggest firms in the Barometer increased their market concentration marginally over that period.4 companies in relation to the In other words, although many new players have entered the market, the biggest firms have managed industry, and an indicator of the amount of competitionto marginally increase their market share. That said, the biggest pharmaceutical firms dominate less than among them, the HHI is defined as the sum of thedo the biggest firms in some other industries. For instance, the HHI reading for the pharmaceutical sector squares of the market sharesin 2009 (1.99) is much lower than that of the information technology services sector (5.73) and the of the 50 largest firms from the universe of 350 listedprecision engineering sector (9.30). companies assessed. For more information on the Barometer The three largest pharmaceutical companies by turnover in 2009—Sinopharm Group, Shanghai methodology, please refer toPharmaceuticals and Nanjing Pharmaceutical—enjoyed a combined revenue share of just 18.5% in 2009, the last section in this report.up from 14.8% in 2004 (see Figure 6).© The Economist Intelligence Unit Limited 2012 9
  11. 11. Asia Competition Barometer: Pharmaceuticals Figure 5: Herfindahl–Hirschman Index 2.00 1.75 1.50 1.25 1.00 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 Herfindahl—Hirschman Index (HHI) 1.54 1.37 1.75 1.75 1.76 1.99 Figure 6: Top ten companies by turnover Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn) Sinopharm Group China 2.17 7.14 Shanghai Pharmaceuticals China 1.64 4.71 Nanjing Pharmaceutical China 0.8 2.13 Ranbaxy Laboratories India 1.22 1.7 Shenzhen Accord Pharmaceutical China 0.24 1.66 Harbin Pharmaceutical Group China 1.08 1.6 Dr Reddy’s Laboratories India 0.42 1.59 Cipla India 0.55 1.27 Max India India 3.31 1.27 Huadong Medicine China 0.44 1.18 Note: These are the ten biggest companies by turnover that were analysed in the Barometer, which considered only publicly listed firms in eight countries: China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam The biggest firms have been able to grow their market share through fierce price competition and industry consolidation. Many of the new players were undoubtedly unable to compete with the scale efficiencies and lower distribution costs of the larger, established players. Meanwhile, China’s government has been leading a drive to push consolidation in the highly fragmented sector, and hence large firms such as Sinopharm and Shanghai Pharmaceuticals are expected to continue their acquisition sprees in 2012-2016. Another reason for the increased market share of the largest Asian firms, according to Achin Gupta, senior vice president of corporate strategy at Glenmark Pharmaceuticals, an Indian firm, is that with rising incomes more Asians can now afford some of the expensive treatments that the big firms license, such as those for diabetes. In Mr Gupta’s view, this trend has had a far greater impact than the global financial crisis on the smaller firms’ market share. Competition is likely to remain intense, particularly as global pharmaceutical majors will be looking to cushion their loss of patented drug revenues through strategic acquisitions of generics manufacturers in10 © The Economist Intelligence Unit Limited 2012
  12. 12. Asia Competition Barometer: Pharmaceuticalsthe region. They will be challenged by several Asian pharmaceutical manufacturers who are fighting for abigger share of the generics market. Meanwhile, smaller Asian pharmaceutical firms will compete to provide specific services, such ascontract manufacturing or research work for larger companies. For instance, Bristol-Myers Squibb, anAmerican pharmaceutical firm, and WuXi PharmaTech, a Shanghai-based contract research organisation(CRO) specialising in pharmaceutical, biotechnology and medical device R&D, announced in March 2011that they have entered a strategic partnership through which WuXi will conduct stability studies on newchemical entities. This is an extension of a long-standing alliance between the two firms, one of manybetween CROs and big pharmaceutical firms to have emerged over the past few years. Similarly, Asian contract manufacturing organisations (CMOs) will also seek to secure more workfrom big pharmaceutical firms. To do so, they will have to compete with regional and Western CMOs.“The ability to provide strict adherence and top quality will be the key to separate the top CMOs from theaverage CMOs,” says Michael Brown, vice president of operations at Lonza Biologics in Singapore. He saysone of the current competitive advantages for Western CMOs is that some customers are still concernedabout standards at Asian firms. The main perceived advantages of Western CMOs are “consistent quality,reliability, IP protection and experience, particularly in the biologics development,” he adds.Profitability: Small increaseTo measure the profitability of the pharmaceutical sector, we developed a composite index of five ratioswhich measure different aspects of a company’s margins (for more details, see the note on methodologyat the end of this report). According to our Barometer, with the exception of gross margin, all other profitmargins have risen relative to 2004 (see Figure 7).Figure 7: Profitability Index150135120105 90 2004 2005 2006 2007 2008 2009Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 Profitability index 102.5 100.0 103.8 110.8 102.6 109.3 EBITDA margin (%) 13.1 12.6 13.3 14.2 13.4 13.7 Gross margin (%) 40.3 39.2 37.7 38.5 37.9 38.4 Return on capital employed (%) 11.1 10.9 14.2 17.1 12.7 16.4 Return on equity (%) 8.3 8.8 13.9 17.4 12.4 16.9 Return on assets (%) 3.6 3.7 6.0 7.8 5.6 8.1© The Economist Intelligence Unit Limited 2012 11
  13. 13. Asia Competition Barometer: Pharmaceuticals The Profitability Index for Asia’s pharmaceutical industry increased from 102.5 in 2004 to 109.3 in5 The composite Profitability 2009.5 Profitability in Asia’s pharmaceutical sector, which was at its highest in 2007, saw a noticeable dipIndex is made up of fiveratios that each represents in 2008, before bouncing back in 2009.a different aspect of a The 2008 global downturn did have an impact on profitability in the regional pharmaceutical sector,company’s profitability. Formore information on the but its effects were muted compared to many other industries. This is because products in many segmentsBarometer methodology,please refer to the last section of the pharmaceutical market are considered necessities, and hence are somewhat recession-proof.in this report. According to IMS health, an industry research firm, pharmaceutical consumption continued to grow through the recession and globally only Estonia and Latvia saw an overall decline in pharmaceutical6 “The impact of the economic consumption by volume.6downturn on global accessto medicines”, IMS Health Despite operating revenues almost tripling from 2004 to 2009, profitability has not increasedfor the World Health dramatically due partly to increases in material costs and overall wages. For instance, the average costOrganisation, Jan 2009 of employees increased from US$6,000 to US$9,000 between 2004 and 2009. Over that same period, the industry’s total employee costs increased from US$1.1bn to US$3.5bn. Over the next few years, Mr Mallon believes that pharmaceutical firms will have to reduce their cost base, while addressing ever-changing customer demands—due to rising incomes and changing disease profiles—and improving access to medicines in order to boost profitability. While recognising the need to cut costs, Mr Gupta is also bullish about the region’s growth prospects. He says both Asian as well as non- Asian pharmaceutical companies are going to be relying on the “increase in affordability of drugs due to GDP growth, better healthcare systems and more extensive healthcare infrastructure” for profitability growth in Asia. Many companies are trying to capture a bigger portion of this growing pie by increasing their product offerings and expanding to rural areas.12 © The Economist Intelligence Unit Limited 2012
  14. 14. Asia Competition Barometer: Pharmaceuticals Case Study: Glenmark Pharmaceuticals 1,500 in 2005/06 to a sales force that is about 3,000-strong today,” Mr Gupta says. “Moreover, the ability of Indian companies to play in the global generics market has given them additional funds that are being Glenmark Pharmaceuticals: The benefits of longstanding presence invested in India.” Glenmark Pharmaceuticals, an Indian pharmaceutical company Mr Gupta says that brand equity has been a big driver of profitability with operations in specialty, generics and out-licensing, has seen sales in Asia. “Leading brands would typically command a slight premium increase from Rs6.04bn (US$138m at 2005 exchange rates) in 2004/05 over lesser known products and they would still sell as a result of to Rs29.5bn in 2010/11 (US$645.2m at 2010 exchange rates), or at a confidence placed in them by doctors,” he says. “The perspective was compound annual growth rate of nearly 31%. India and South-east Asia that these products were of higher quality.” He believes this trend together contribute around 25-30% of its overall profits, and about will continue for at least the next five years. Other factors such as GDP 50% of its branded business income. growth, wider insurance coverage and better healthcare infrastructure Achin Gupta, the firm’s senior vice president of corporate strategy, will all increase drug penetration. They will also open up opportunities says although India is a key market, the company is growing even faster for elective treatments and other more expensive treatments. in some other emerging markets such as Brazil, Mexico, the CIS, Russia However, one factor Mr Gupta thinks could dampen profitability is and Eastern Europe. “Our branded generics business is growing at the “threat of reference pricing coming in India where the top three about 40% outside of Asia,” he says. brands in the industry will be used as a reference price for the rest of Competition in Asia has increased over the past five years, Mr Gupta the companies.” Additionally, he worries about price controls that are says, largely due to two factors. First is the increased interest from already prevalent in a few countries where government buys most of multinationals in the world’s emerging markets. Second is the growth the drugs. “They issue tenders and these are very price-competitive,” of Indian firms. “We went from having a sales force of about 1,200- he says, pushing down profitability. © The Economist Intelligence Unit Limited 2012 13
  15. 15. Asia Competition Barometer: Pharmaceuticals Positioning for success in Asia Sustained growth O ver the next few years, global pharmaceutical firms will be increasing their presence in the region in order to tap the growing market, lower their production costs, and improve the efficiency of their R&D processes. Mr Gupta at Glenmark Pharmaceuticals says that most firms are expecting growth of 15% per annum in the Asian markets over the next five to ten years. The pharmaceutical markets of the eight countries covered in this study are set to expand rapidly over the next few years, led by China (see Figure 8). Several factors will continue to drive growth in the region’s pharmaceutical sector. First is the region’s secular growth story. Second is Asia’s continued attractiveness as a manufacturing destination. Wages in the Indian pharmaceutical sector, for instance, are just 30% of European salaries or 20% of those in the7 “India’s pharmaceutical US.7 Among other things, Asia has become an important destination for the development of vaccines forindustry on course forglobalization”, Deutsche Bank diseases such as Hepatitis A and B, and seasonal influenza.Research, Apr 9th 2008 Third, more firms are investing in R&D in Asia. The cost of clinical trials in India, for instance, is about Figure 8: Pharmaceutical sales (US$ bn) 2010 2016 200 150 100 50 0 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: EIU; Epsicom14 © The Economist Intelligence Unit Limited 2012
  16. 16. Asia Competition Barometer: Pharmaceuticalshalf of what it is in the US, and total R&D savings can be of a similar magnitude.8 Asia has a large talent 8 “India’s Emergence as a Global R&D Center”, Swedishpool, offering it a huge human capital advantage over other regions. The number of doctorates awarded Institute for Growth Policyin the natural sciences and in engineering has either leveled off or fallen in countries such as the US, the Studies, Dec 2007UK and Germany since the late 1990s, says PWC, a consultancy, whilst it has been increasing steadily inAsia, suggesting that Asia’s talent and knowledge base is increasing.9 9 “Pharma 2020: The vision – Which path will you take?”, Global pharmaceutical firms have therefore been investing in Asia. For example, Sanofi, a French PricewaterhouseCoopers, Junpharmaceutical firm, said in October 2011 that it will set up a manufacturing plant in Hyderabad, 2007India. The company will invest Rs5bn (US$102.9m) in the facility, which will produce vaccines for thelocal market and may begin the production of other products for diabetes treatment, animal healthand consumer healthcare. In 2009, the company acquired Hyderabad-based Shantha Biotechnics in adeal valuing the company at €550m (US$764.5m). Its Vietnamese subsidiary also plans to build a thirdpharmaceutical plant in Ho Chi Minh, Vietnam. Similarly, AstraZeneca is investing US$230m in a newmanufacturing plant in China Medical City in China’s Jiangsu province. The new site represents its largestever investment in a single manufacturing facility globally.10 10 “Ground-breaking of AstraZeneca’s Manufacturing This trend of inward investments in the pharmaceutical sector will continue in the next few years as the Facility in China Medical City”,big global companies look to profit from Asia’s unique position as a hub for the manufacture of generic AstraZeneca, Jan 6th 2012drugs, a destination for cheaper production costs and a fast-growing pharmaceutical market. While the opportunities in Asia’s pharmaceutical industry are large, so are the risks. Governmentsaround Asia are still in the process of determining how best to design and finance their healthcaresystems. Some decisions will have a profound impact. For example, Mr Gupta believes that regulatoryshifts surrounding the use of authorised generics (referred to by some as branded generics) will greatlyinfluence the industry. There has been some pushback in Europe and the US against the use of authorisedgenerics. Aiswariya Chidambaram, an analyst at Frost & Sullivan, a research house, concludes in anarticle that “prohibiting the launch of authorised generics during the 180 days exclusivity period willnot only help independent generic firms gain commendable profit but will also facilitate easier access toaffordable medicine for consumers.”11 11 “Authorised Generics: Boon or Bane?”, Frost & Sullivan, Mr Gupta says that pressures may force some Asian markets to implement a similar ban on authorised Aug 12th 2011generics. This would hurt big pharmaceutical firms but benefit generics manufacturers. On a related note,Mr Mallon warns that healthcare and drug payors are under pressure to increase adoption of cheapergeneric alternatives in order to reduce overall healthcare costs. Global firms will need to carefully monitorregulatory developments around Asia as they plan their market strategies.Patent expirations will lead to more partnerships involving Asiangenerics manufacturersBig global pharmaceutical producers face serious challenges over the next few years, as many of theirblockbuster drugs have either gone off-patent or soon will, hurting their profitability. A number of 12 “Industries in 2012”,popular drugs will lose their patent protection in the US this year, leaving their producers exposed to Economist Intelligence Unit, Dec 21st 2011competition from generics manufacturers and slashing their revenues by up to 40%.12 Global ratings 13 “Indian pharma’s outlookagency Fitch estimates branded drugs with sales of US$21bn went off-patent in 2011, and another stable for 2012, says Fitch”,US$52bn worth of branded drugs are set to lose their patents in 2012 alone.13 The expiry of patents could Pharma Times, Feb 2nd 2012© The Economist Intelligence Unit Limited 2012 15
  17. 17. Asia Competition Barometer: Pharmaceuticals be a huge driver for the sales of Asian generic manufacturers who stand to benefit most from the so-called patent cliff. In response to the impending drop in revenues, big pharmaceutical companies are rethinking their corporate strategies and redeploying their resources, generally towards R&D and emerging markets. In the fourth quarter of 2011, Pfizer, an American firm and the world’s largest drug manufacturer, saw a 24% fall in its sales of Lipitor, largely due to a 42% decline in the US. This was due to competition from generic versions of the cholesterol drug and the loss of patent protection for the drug in the US in November 2011. Pfizer said last year it would attempt to slash its costs through layoffs of thousands of14 “Pfizer trims 2012 view, researchers in order to compensate for the declining sales of Lipitor, once the world’s top selling drug.14citing stronger dollar”,Reuters, Jan 31st 2012 Similarly, AstraZeneca announced in February 2012 that it would lay off 7,300 employees or 12% of its workforce over the next two years, as many of the company’s top-selling drug patents are expiring over the next five years. Reflecting its shifting priorities, the firm has also hired “thousands of new15 “AstraZeneca plans to cut employees for its expansion into emerging markets and for researching and producing biotech drugs”.157,300 jobs”, The Wall StreetJournal, Feb 3rd 2012 Companies that stand to benefit most from these patent expirations are generics drug manufacturers such as India’s Ranbaxy and Dr Reddy’s Laboratories. The generics market’s growth prospects are good also because governments in many countries with publicly funded healthcare plans are looking to curb overall drug spending. According to Datamonitor, a data provider, the Asia Pacific generics market expanded at a compound annual growth rate of 13.5% between 2006 and 2010 to reach US$44.8bn in revenues. It expects the market to grow by 12% in 2010-2015 to reach US$79bn by 2015. In anticipation of this shifting competitive landscape, big global pharmaceutical firms have tried to get a foothold in this generics industry through strategic acquisitions. For instance, in 2008 Japan’s Daiichi-Sankyo acquired a controlling stake in generics manufacturer Ranbaxy Laboratories for US$4.6bn. Two years later, US-based Abbott Laboratories acquired the generics business of Piramal Healthcare for US$3.7bn. These represent two of the largest acquisitions across all sectors in India. Meanwhile, Israel’s Teva Pharmaceutical Industries is also looking at acquisitions in Asia, a region where it expects generics16 “Teva eyes more sales to boom.16acquisitions in Asia”, PharmaTimes, Jan 12th 2012 Mr Gupta at Glenmark Pharmaceuticals says we are seeing global players stepping into the authorised generics arena. “There is increasing acceptance on the part of MNCs to customise their offerings to markets like India and other leading markets in the region such as Malaysia and the Philippines,” he says, adding that this trend is going to continue. The generics manufacturers also stand to benefit from such strategic acquisitions or partnerships. For instance, Asian generics manufacturers have often had a tough time selling their products in Western markets. They are faced with a variety of obstacles such as legal challenges from patent owners, difficulties in meeting international regulatory and quality standards and fierce competition. Partnerships with global pharmaceutical companies can help them overcome these challenges. In addition, through partnerships with big pharmaceutical firms with cutting-edge technologies, generics manufacturers can move up the value chain and become more innovative. However, such partnerships and acquisitions do have their pitfalls. For instance, critics suggest that17 “Daiichi Yet to Gain from Daiichi-Sankyo did not conduct thorough due diligence on Ranbaxy, and in its quest to buy a matureRanbaxy Buy”, The Wall StreetJournal, Mar 16th 2011 company with a significant presence in the generics segment, the company may have overpaid.1716 © The Economist Intelligence Unit Limited 2012
  18. 18. Asia Competition Barometer: PharmaceuticalsWithin a month of the acquisition, the US Food and Drug Administration banned the import of 30 ofRanbaxy’s generic drugs for manufacturing violations and also accused Ranbaxy of selling misbrandedpharmaceuticals. The company has subsequently experienced delays in getting regulatory approval to sellother drugs in the US. The US Justice Department has since filed a proposed settlement with Ranbaxy, andthe company has set aside US$500m for liabilities connected to the inquiry. All this points to the fact thatthere are risks involved with mergers and acquisitions in an industry with varying national regulations, andquality and safety standards. Case Study: AstraZeneca of its activities in the region, “from the way we partner with other organisations to the way we fund new research and deliver healthcare services”. AstraZeneca: Emphasis on innovation On a related note, Mr Mallon also believes it is important for the AstraZeneca, a global biopharmaceutical company, saw Asia Pacific industry to address the growing needs of payors and to improve access sales rise more than 7% in 2011 to reach US$6bn. Mark Mallon, the to medicines. There is “an under-served population of people who can firm’s regional vice president of Asia Pacific and president of China, only access limited healthcare infrastructures and have a limited ability says Asia is “a fundamentally attractive, high growth region” for the to pay for medicines,” he says. pharmaceutical industry. Over the next few years, he expects the sector For example, in China most of the company’s business currently to experience strong double-digit growth in emerging markets such comes from hospitals in 200 of the largest cities of more than 1m as China, Vietnam and India, and low single-digit growth in the more people. Nearly 900m people live outside these cities and the Chinese mature markets such as Australia, Japan and Taiwan. government is providing major investment to improve healthcare in According to Mr Mallon, competition in the pharmaceutical sector these communities. “We want to be part of this broader market and in Asia has intensified as major pharmaceutical companies step up build a sustainable business in serving those people,” he says. their investments in the region across sales and marketing, R&D, and In order to do so, the company is working with the China Health manufacturing. He expects this trend to continue. “Competition from Promotion Foundation and the Ministry of Health to improve generic firms has also increased, both in established and emerging community healthcare by strengthening the training of its general markets,” he says. In his view, competition from Asian pharmaceutical practitioners. It is also sponsoring a three-year programme that will firms tends to be more intense in markets and segments with a high train 30,000 doctors so they can better treat some common chronic generics penetration. diseases. Mr Mallon emphasises that profitability in the industry has Reaching out to underserved segments of the population is been driven by innovation—both in terms of new products and new perhaps not only a moral imperative for some pharmaceutical firms, commercial models—and a growing focus on costs. He adds that “Asia’s but can also prove strategically astute, as they seek to improve ties strong history of innovation presents an environment where creativity with governments and regulators in the region, and grow the overall can flourish”. AstraZeneca, he says, is innovating across a broad range market.© The Economist Intelligence Unit Limited 2012 17
  19. 19. Asia Competition Barometer: Pharmaceuticals Case Study: Lonza conjugated antibodies, cytotoxics we do not see much competition out of Asia.” Similarly, the firm has few competitors in the biological custom manufacturing space, where Mr Brown believes the Asian Lonza: Focus on quality competition is “still on a learning curve”. However, Lonza does expect Lonza, a Swiss chemicals and biotechnology firm whose products increased competition from Asian competitors in the life science feed into the pharmaceutical, healthcare and life sciences industries, ingredients business, which supports nutraceuticals. built its first Asian plant in China 15 years ago. Since then, the firm’s Meanwhile, Mr Brown believes that rising incomes in the region are production and R&D network in the region has grown consistently, slowly eroding the labour cost advantages that some Asian competitors says Michael Brown, vice president of operations at Lonza Biologics in currently enjoy. Additionally, Asian governments are also raising their Singapore. Over the last ten years, Lonza has invested about CHF1bn environmental protection and quality standards. This “increasing (US$1.1bn) in Asia. Some 1,400 of its 11,000-strong global workforce rigidness coming from regulatory authorities will force Asian are based in the region today. Asia contributes 14% of Lonza’s overall competitors to obey strict rules,” he says, hence raising their cost of revenues and this is expected to rise to 20% by 2015. compliance. He expects Asian competitors to invest heavily to upgrade For its chemical manufacturing business, Asia represents “a their facilities, further reducing any price advantages they enjoy. significant platform of growth for its existing and niche technologies,” Over the next five years, Lonza aims to grow its biological Mr Brown says. But in terms of the market for new biologics, aside from development services in Asia by cementing its relationships with Japan—one of the seven biggest markets worldwide—demand in Asia traditional pharmaceutical companies and new local companies that is relatively small. “However, domestic Asian markets, especially China, are currently expanding in Asia. Mr Brown believes that there are an are future growth opportunities for new medical entities (NMEs), and increasing number of firms developing a clinical footprint across the also biosimilars and generics,” he adds. region, and Lonza aims to support their pipelines with its products and Mr Brown says that competition in Asia has increased in the small services. molecules segment of the custom manufacturing business. “However, the number of new competitors is somewhat limited considering that the products we manufacture are all heavily regulated and require complex manufacturing technologies,” he says. “In areas like peptides,18 © The Economist Intelligence Unit Limited 2012
  20. 20. Asia Competition Barometer: PharmaceuticalsOutlookC ontinued economic growth in Asia has led to increased household incomes and spending on healthcare and pharmaceuticals. “In Asia, clearly we [in the industry] are benefitting from thegrowing number of people in it who have better access to healthcare and are willing and able to payfor medicines,” Mr Mallon at AstraZeneca says. Additionally, the drive by governments in the region tobroaden access will also boost demand for Asia’s pharmaceutical market. Rising incomes and urbanisation in Asia have also led to lifestyle changes that have raised theincidence of developed-world diseases in the region. Together with longer life expectancies and otherdemographic changes, these trends are rapidly broadening the healthcare needs of the region, drivingdemand for a range of pharmaceutical products. Separately, as in many other industries, Asia has also gradually become a key source of production andR&D for the pharmaceutical sector. This trend is likely to continue, owing primarily to lower productioncosts and increasingly sophisticated R&D capabilities, both underpinned by the huge talent pools aroundthe region. Over the next few years, the region’s industry is likely to be shaped by two separate but relatedcompetitive trends. First is the competition between generics manufacturers and innovative big brandfirms, particularly as many blockbuster drug patents expire. We are likely to see many more mergers,acquisitions and other partnerships between generics manufacturers and big brand companies, asthey seek to exploit complementary advantages. Although the jury is still out on the value that maybe created—the Daiichi-Sankyo and Ranbaxy deal providing some cautionary lessons—there is a goodchance that the sector’s global champions of the future may be the products of partnerships involvingAsian firms. Second is the tension between small and large Asian firms. The sector has witnessed someconsolidation in recent years, and there is doubt about the extent to which small firms can competewith larger firms that enjoy scale efficiencies and lower distribution costs. Nevertheless, there are© The Economist Intelligence Unit Limited 2012 19
  21. 21. Asia Competition Barometer: Pharmaceuticals certain niches that small firms can continue to exploit. They may not have the resources to invest in drug discovery and development but many of them have enjoyed success as low-cost generic producers. Over the last two decades, hundreds of new pharmaceutical companies began operations in order to the meet the booming demand for generic drugs, specialty drugs and biotech-based products. Furthermore, with increased cost pressures in Western markets, Asia has become an important hub for CMOs and CROs. Asian CMOs are accounting for a growing share of global pharmaceutical production and as a result of increasing demand for pharmaceutical products in the region, smaller Asian pharmaceutical companies can expect to continue benefitting from the outsourcing of manufacturing as well as18 “The changing research.18dynamics of pharmaoutsourcing in Asia: Are you Given Asia’s rapid growth, and the confluence of these different pharmaceutical sector businessreadjusting your sights?”, models in the region, the region is well poised to produce many of the world’s most competitive andPricewaterhouseCoopers,2008 innovative pharmaceutical firms of the future.20 © The Economist Intelligence Unit Limited 2012
  22. 22. Asia Competition Barometer: PharmaceuticalsBarometer methodologyT o assess the intensity of competition and understand the changing market dynamics in key sectors, the Economist Intelligence Unit has developed the Asia Competition Barometer. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics ofcompetitiveness in Asia for select industries between 2004 and 2009. Assessing a universe of over 350 publicly-listed pharmaceutical companies across eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometerexamines changing profitability and the competition landscape for the Pharmaceutical sector.How do we define the pharmaceutical sector?The pharmaceutical sector includes the following: manufacture of basic pharmaceutical products andpreparations, and the wholesale of pharmaceutical goods.MethodologyThe Barometer has two dimensions: profitability and market concentration.Profitability IndexTo assess the aggregate profitability of the pharmaceutical sector in Asia, the Economist IntelligenceUnit developed a composite index of five ratios that each represent a different aspect of a company’sprofitability: • EBITDA margin (%): A measure of a company’s operating profitability. It is equal to earningsbefore interest, tax, depreciation and amortisation (EBITDA) divided by total revenue. Because EBITDAexcludes depreciation and amortisation, EBITDA margin provides a clearer view of a company’s coreprofitability. An increase in competition may put pressure on an industry’s profit margins.• Gross margin (%): When used as a market measure of competition, gross margin measures the© The Economist Intelligence Unit Limited 2012 21
  23. 23. Asia Competition Barometer: Pharmaceuticals profitability considering only the costs of goods sold. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. An increase in competition tends to reduce firms’ ability to increase prices and thereby increase its gross margin. • Return on capital employed (%): A measure of the efficiency and profitability of a company’s capital investments. Return on capital employed also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. An increase in competition may require firms to employ additional capital to maintain profitability. • Return on equity (%): A measure of the rate of return on the shareholders’ equity. It measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. Return on equity shows how well a company uses shareholder funds to generate earnings growth. A rise in competition tends to put pressure on returns on shareholder funds. • Return on assets (%): A measure of how profitable a company’s assets are in generating revenue, or how profitable a company is relative to its assets. Return on assets determines a company’s ability to utilise its assets efficiently and effectively. Higher competition tends to put pressure on firms’ ability to maintain return on assets. We aggregated company-level data for 350 publicly-quoted pharmaceutical companies and examined their profitability ratios. To enable observation of trends over time, a composite Profitability Index was developed (where year 2005 = 100). EBITDA and gross margin are given a higher weighting in the index as they speak directly to bottom line profitability, while the return on capital employed, return on equity and return on assets ratios speak to how a company make use of its various resources to drive return (i.e efficiency/ productivity). Market concentration Profitability indicator Weight in Profitability Index EBITDA margin (%) 35% Gross margin (%) 35% Return on capital employed (%) 10% Return on equity (%) 10% Return on assets (%) 10%22 © The Economist Intelligence Unit Limited 2012
  24. 24. Asia Competition Barometer: PharmaceuticalsTo assess market concentration, the Economist Intelligence Unit calculated the Herfindahl-HirschmannIndex (HHI) for the Pharmaceutical sector in Asia from 2004 to 2009. A measure of the size of companiesin relation to the industry, and an indicator of the amount of competition among them, the HHI is definedas the sum of the squares of the market shares of the 50 largest firms from the universe of over 350listed companies assessed.19 HHI values can range from 0 to 1.0, moving from an extremely fragmented 19 Or summed for all the firms in the case that there aremarket (0) to a monopoly (1). HHI values have been multiplied by 100 to achieve a scale consistent with fewer than 50.profitability indicators. A rising HHI index generally indicates falling market competition, while a fall inthe HHI suggests that competition is increasing.© The Economist Intelligence Unit Limited 2012 23
  25. 25. Whilst every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person on thisreport or any of the information, opinions or conclusionsset out herein.

×