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Pharma: Europe and ROW focus

Jul 17, 2007

The high level of competition witnessed in the US generics market has propelled generic companies both in India and globally to geographically diversify in a bid to de-risk their revenue profile and sustain overall profitability. And while Europe has been the next best choice, the emerging markets of Latin America, Africa, CIS and central and Eastern Europe have also come on the radar of domestic pharma companies. In this article, we shall take a look at the potential of these markets and the challenges going forward. Why Europe?

Europe is a heterogeneous market as compared to the US with each country having different market characteristics and regulations. Besides this, while the generics penetration in the UK and Germany is high, the same is relatively lesser in markets such as France, Italy and Spain, indicating the potential for generics to gain traction going forward. Akin to the US, the governments of the European nations are also under pressure to reduce healthcare costs given the rise in the aged population and thereby the increased spending on pharmaceuticals. Also, branded generics can be launched in some of these markets, as a result of which companies here can earn higher profits. Thus, domestic pharma companies having been making increasing strides in the European markets by acquiring companies with a strong product pipeline and an established marketing network. The rationale for making acquisitions is to obviate the need to establish a presence in Europe right from scratch.

Why the emerging markets?

Domestic pharma companies have evinced a lot of interest in the emerging markets of late as these markets have been growing much faster than the US and Europe, posting double-digit growth rates. Since these markets are not as regulated as those in the US and Europe, generics here can be branded, consequently enabling companies to earn higher margins. The disease profile in these countries is also shifting towards the chronic therapy segment and in the African continent, organisations such as the WHO and the PEPFAR are playing an important role in funding healthcare costs (especially for diseases such as AIDS, the prevalence of which is very high in Africa). Hence, given the potential, domestic pharma companies are setting shop in these countries to boost revenues and profitability and partially offset the pricing pressure witnessed not only in the US market but also in some of the western European countries.

The challenges are...

While Europe is increasingly becoming a focus area for domestic pharma companies, there has been a perceptible shift in the dynamics of the western European markets. For instance, the UK has been facing severe pricing pressure and regulatory changes in France and Germany have taken its toll on the performance of Indian companies present in these markets. To put things into perspective, while Germany initially was a branded generics market, the new set of regulatory changes in the German healthcare system are expected to commoditise generics going forward. This means that pricing pressure is likely to be persistent in this market as well. While the efforts of the government to increase the use of generics will bolster volumes, efforts to control costs is likely to escalate into pricing pressure going forward.

In the emerging markets, competition is likely to intensify as more and more companies establish a presence in these countries. Despite this, the growth in revenues and margins are likely to be on the higher side as compared to the US and Western Europe. This is because these emerging markets have been growing at a much faster pace led by a higher per capita pharmaceutical expenditure and an increasing utilisation of generic drugs.

To sum up...

Presence across geographies has been gaining momentum across global generic companies. Besides domestic companies such as Ranbaxy, Dr.Reddy's and Sun Pharma, global generic companies such as Teva and Mylan have also been focusing on establishing a global footprint and hence have been active on the acquisition front. Given the high barriers to entry in terms of product introduction and a strong marketing network, at the end of the day those pharma companies, which have a wider geographical reach, will have the upper edge over their peers in the longer term.

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