Asia Competition Barometer Pharmaceuticals An Economist Intelligence Unit report Supported by Asia Competition Barometer: Pharmaceuticals Contents Preface 2 Executive summary Asia’s growing importance for corporate performance and global competitiveness Competition and profitability at Asian firms Competition: Marginal decrease in an extremely fragmented sector 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 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 2012 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Executive summary W 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 growth prospects in many other parts of the world—has attracted new investment into the market both from regional players and Western multinationals (MNCs) As a result, competition in the region is expected to intensify Given the darkening global economic outlook, and the expected impact on some economies and sectors in the region, growth and profitability look uncertain in the near term But over the medium to longer term, Asia’s strong economic fundamentals will ensure consistent growth across a range of industries How are companies positioning themselves to capitalise on Asia’s growth opportunities over the next few years? The Asia Competition Barometer assesses the intensity of competition and changing market dynamics in several key sectors This report examines the pharmaceutical sector, which includes the manufacture of basic 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 strong economic growth and demographic changes Several broad trends, including rising household incomes, increased government expenditure on healthcare, higher life expectancies, consumer health awareness, and the growing incidence of chronic developed-world diseases associated with changing lifestyles have all boosted demand for pharmaceutical products in the region According to the Economist Intelligence Unit (EIU), regional pharmaceutical sales have more than doubled from US$97bn in 2001 to US$214.2bn in 2010 By 2016, the EIU expects sales to hit US$386bn, reflecting an annual average growth rate of more than 13% • The number of players, homegrown and global, is rising The number and size of publicly-listed firms in the pharmaceutical sector in Asia has increased dramatically The total number of listed companies in © The Economist Intelligence Unit Limited 2012 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 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Asia’s growing importance for corporate performance and global competitiveness O 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 2010.1 By 2016, the Economist Intelligence Unit (EIU) expects this proportion to rise to 38.9% There are several broad trends that have been driving Asia’s pharmaceutical sector The first trend is demographic change that is boosting market demand Many Asian countries have been experiencing rapid population growth India’s population, for example, grew from 1.02bn in 2001 to 1.18bn in 2010 The 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 increased life expectancy in most countries (see Figure 2) On a related note, those Asian countries with low birth rates, such as China, Japan and Singapore, are now facing ageing populations, which presents growth opportunities for pharmaceutical companies making specialised drugs for diseases common among the elderly Figure 1: Population (m) Asia 4,000 China India Indonesia Asia here includes Bangladesh, China, Hong Kong, Indonesia, India, Japan, South Korea, Malaysia, Myanmar, Philippines, Pakistan, Singapore, Sri Lanka, Thailand, Taiwan, and Vietnam Japan 3,500 3,000 2,500 2,000 1,500 1,000 500 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: BPS; China National Bureau of Statistics; EIU; US Bureau of Census © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Figure 2: Life expectancy (years) 2001 2016 100 80 60 40 20 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: US Bureau of Census; Economist Intelligence Unit 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 4-14 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 the world’s largest diabetic populations, with some 51m and 43m people respectively.2 Experts believe that the prevalence of diabetes in Asia will rise rapidly between now and 2030 (see Figure 3) Meanwhile, governments in the region have been investing in healthcare infrastructure and services 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 Australia Japan 15 12 Sri Lanka Malaysia S Korea Thailand India 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 4-14 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals per capita healthcare spending in the region (see Figure 4) This rising healthcare spending has benefited the pharmaceutical sector According to the EIU, the pharmaceutical market has grown rapidly in Asia, with sales having more than doubled from US$97bn in 2001 to US$214.2bn in 2010 By 2016, the EIU expects it to hit US$386bn, reflecting an annual average growth rate of more than 13% Figure 4: Healthcare spending (per head, US$) 2010 2030 3,000 2,500 2,000 1,500 1,000 500 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Note: 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 and pharmaceutical company, up from just 10% in 1990.3 Between 2004 and 2011, fDi Markets, a data provider, recorded 653 cross-border investment projects in 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 largest recipient with 186 inward investments and was closely followed by India and Singapore with 157 and 94 investments respectively 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 The region is also increasingly seen as a key R&D hub, given its low costs and huge talent pools Of the 653 cross-border pharmaceuticals 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 and support with 168 (26%) British firm GlaxoSmithKline (GSK), Swiss company Novartis, and Germany’s Bayer led the investment charts 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 and Singapore Among other things, Bayer has been investing in R&D for diseases, such as liver cancer, that have 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 Bayer corporate website 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 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Competition and profitability at Asian firms T 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 firms to 370 Over the same period, the total combined revenue of publicly-listed pharmaceutical companies almost tripled from US$27.4bn to more than US$73bn Competition: Marginal decrease in an extremely fragmented sector Asia’s pharmaceutical sector is extremely fragmented, with the presence of numerous smaller manufacturers Just in India, for example, there are more than 10,000 pharmaceutical companies, most of which are small To capture the intensity of competition in the pharmaceutical sector in Asia, we have used the Herfindahl–Hirschman Index (HHI), which measures the market concentration of an industry’s largest firms HHI values can range from (extremely fragmented market) to 1.0 (monopoly) Here we have multiplied the values by 100 to achieve a scale consistent with profitability indicators (see below) The HHI for Asia’s T&L industry increased from 1.54 in 2004 to 1.99 in 2009 (see Figure 5), signifying that the 50 biggest firms in the Barometer increased their market concentration marginally over that period.4 In other words, although many new players have entered the market, the biggest firms have managed to marginally increase their market share That said, the biggest pharmaceutical firms dominate less than the biggest firms in some other industries For instance, the HHI reading for the pharmaceutical sector in 2009 (1.99) is much lower than that of the information technology services sector (5.73) and the precision engineering sector (9.30) The three largest pharmaceutical companies by turnover in 2009—Sinopharm Group, Shanghai Pharmaceuticals and Nanjing Pharmaceutical—enjoyed a combined revenue share of just 18.5% in 2009, up from 14.8% in 2004 (see Figure 6) © The Economist Intelligence Unit Limited 2012 A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms from the universe of 350 listed companies assessed For more information on the Barometer methodology, please refer to the last section in this report 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 Herfindahl—Hirschman Index (HHI) 2004 2005 2006 2007 2008 2009 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 in 10 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals the region They will be challenged by several Asian pharmaceutical manufacturers who are fighting for a bigger share of the generics market Meanwhile, smaller Asian pharmaceutical firms will compete to provide specific services, such as contract manufacturing or research work for larger companies For instance, Bristol-Myers Squibb, an American pharmaceutical firm, and WuXi PharmaTech, a Shanghai-based contract research organisation (CRO) specialising in pharmaceutical, biotechnology and medical device R&D, announced in March 2011 that they have entered a strategic partnership through which WuXi will conduct stability studies on new chemical entities This is an extension of a long-standing alliance between the two firms, one of many between 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 work from big pharmaceutical firms To 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 the average CMOs,” says Michael Brown, vice president of operations at Lonza Biologics in Singapore He says one of the current competitive advantages for Western CMOs is that some customers are still concerned about 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 increase To measure the profitability of the pharmaceutical sector, we developed a composite index of five ratios which measure different aspects of a company’s margins (for more details, see the note on methodology at the end of this report) According to our Barometer, with the exception of gross margin, all other profit margins have risen relative to 2004 (see Figure 7) Figure 7: Profitability Index 150 135 120 105 90 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 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 Profitability index © The Economist Intelligence Unit Limited 2012 11 Asia Competition Barometer: Pharmaceuticals The composite Profitability Index is made up of five ratios that each represents a different aspect of a company’s profitability For more information on the Barometer methodology, please refer to the last section in this report “The impact of the economic downturn on global access to medicines”, IMS Health for the World Health Organisation, Jan 2009 12 The Profitability Index for Asia’s pharmaceutical industry increased from 102.5 in 2004 to 109.3 in 2009.5 Profitability in Asia’s pharmaceutical sector, which was at its highest in 2007, saw a noticeable dip in 2008, before bouncing back in 2009 The 2008 global downturn did have an impact on profitability in the regional pharmaceutical sector, 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 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 pharmaceutical consumption by volume.6 Despite operating revenues almost tripling 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 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 nonAsian 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 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Case Study: Glenmark Pharmaceuticals Glenmark Pharmaceuticals: The benefits of longstanding presence Glenmark Pharmaceuticals, an Indian pharmaceutical company with operations in specialty, generics and out-licensing, has seen sales increase from Rs6.04bn (US$138m at 2005 exchange rates) in 2004/05 to Rs29.5bn in 2010/11 (US$645.2m at 2010 exchange rates), or at a compound annual growth rate of nearly 31% India and South-east Asia together contribute around 25-30% of its overall profits, and about 50% of its branded business income Achin Gupta, the firm’s senior vice president of corporate strategy, says although India is a key market, the company is growing even faster in some other emerging markets such as Brazil, Mexico, the CIS, Russia and Eastern Europe “Our branded generics business is growing at about 40% outside of Asia,” he says Competition in Asia has increased over the past five years, Mr Gupta says, largely due to two factors First is the increased interest from multinationals in the world’s emerging markets Second is the growth of Indian firms “We went from having a sales force of about 1,200- © The Economist Intelligence Unit Limited 2012 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 invested in India.” Mr Gupta says that brand equity has been a big driver of profitability in Asia “Leading brands would typically command a slight premium over lesser known products and they would still sell as a result of confidence placed in them by doctors,” he says “The perspective was that these products were of higher quality.” He believes this trend will continue for at least the next five years Other factors such as GDP growth, wider insurance coverage and better healthcare infrastructure will all increase drug penetration They will also open up opportunities for elective treatments and other more expensive treatments However, one factor Mr Gupta thinks could dampen profitability is the “threat of reference pricing coming in India where the top three brands in the industry will be used as a reference price for the rest of the companies.” Additionally, he worries about price controls that are already prevalent in a few countries where government buys most of the drugs “They issue tenders and these are very price-competitive,” he says, pushing down profitability 13 Asia Competition Barometer: Pharmaceuticals Positioning for success in Asia Sustained growth O “India’s pharmaceutical industry on course for globalization”, Deutsche Bank Research, Apr 9th 2008 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 the US.7 Among other things, Asia has become an important destination for the development of vaccines for diseases such as Hepatitis A and B, and seasonal influenza 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 China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: EIU; Epsicom 14 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals half of what it is in the US, and total R&D savings can be of a similar magnitude.8 Asia has a large talent pool, offering it a huge human capital advantage over other regions The number of doctorates awarded in the natural sciences and in engineering has either leveled off or fallen in countries such as the US, the UK and Germany since the late 1990s, says PWC, a consultancy, whilst it has been increasing steadily in Asia, suggesting that Asia’s talent and knowledge base is increasing.9 Global pharmaceutical firms have therefore been investing in Asia For example, Sanofi, a French pharmaceutical firm, said in October 2011 that it will set up a manufacturing plant in Hyderabad, India The company will invest Rs5bn (US$102.9m) in the facility, which will produce vaccines for the local market and may begin the production of other products for diabetes treatment, animal health and consumer healthcare In 2009, the company acquired Hyderabad-based Shantha Biotechnics in a deal valuing the company at €550m (US$764.5m) Its Vietnamese subsidiary also plans to build a third pharmaceutical plant in Ho Chi Minh, Vietnam Similarly, AstraZeneca is investing US$230m in a new manufacturing plant in China Medical City in China’s Jiangsu province The new site represents its largest ever investment in a single manufacturing facility globally.10 This trend of inward investments in the pharmaceutical sector will continue in the next few years as the big global companies look to profit from Asia’s unique position as a hub for the manufacture of generic drugs, 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 Governments around Asia are still in the process of determining how best to design and finance their healthcare systems Some decisions will have a profound impact For example, Mr Gupta believes that regulatory shifts surrounding the use of authorised generics (referred to by some as branded generics) will greatly influence the industry There has been some pushback in Europe and the US against the use of authorised generics Aiswariya Chidambaram, an analyst at Frost & Sullivan, a research house, concludes in an article that “prohibiting the launch of authorised generics during the 180 days exclusivity period will not only help independent generic firms gain commendable profit but will also facilitate easier access to affordable medicine for consumers.”11 Mr Gupta says that pressures may force some Asian markets to implement a similar ban on authorised generics 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 cheaper generic alternatives in order to reduce overall healthcare costs Global firms will need to carefully monitor regulatory developments around Asia as they plan their market strategies “India’s Emergence as a Global R&D Center”, Swedish Institute for Growth Policy Studies, Dec 2007 “Pharma 2020: The vision – Which path will you take?”, PricewaterhouseCoopers, Jun 2007 10 “Ground-breaking of AstraZeneca’s Manufacturing Facility in China Medical City”, AstraZeneca, Jan 6th 2012 11 “Authorised Generics: Boon or Bane?”, Frost & Sullivan, Aug 12th 2011 Patent expirations will lead to more partnerships involving Asian generics manufacturers Big global pharmaceutical producers face serious challenges over the next few years, as many of their blockbuster drugs have either gone off-patent or soon will, hurting their profitability A number of popular drugs will lose their patent protection in the US this year, leaving their producers exposed to competition from generics manufacturers and slashing their revenues by up to 40%.12 Global ratings agency Fitch estimates branded drugs with sales of US$21bn went off-patent in 2011, and another US$52bn worth of branded drugs are set to lose their patents in 2012 alone.13 The expiry of patents could © The Economist Intelligence Unit Limited 2012 12 “Industries in 2012”, Economist Intelligence Unit, Dec 21st 2011 13 “Indian pharma’s outlook stable for 2012, says Fitch”, Pharma Times, Feb 2nd 2012 15 Asia Competition Barometer: Pharmaceuticals 14 “Pfizer trims 2012 view, citing stronger dollar”, Reuters, Jan 31st 2012 15 “AstraZeneca plans to cut 7,300 jobs”, The Wall Street Journal, Feb 3rd 2012 16 “Teva eyes more acquisitions in Asia”, Pharma Times, Jan 12th 2012 17 “Daiichi Yet to Gain from Ranbaxy Buy”, The Wall Street Journal, Mar 16th 2011 16 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 of researchers in order to compensate for the declining sales of Lipitor, once the world’s top selling drug.14 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 new employees for its expansion into emerging markets and for researching and producing biotech drugs”.15 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 generics sales to boom.16 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 have their pitfalls For instance, critics suggest that Daiichi-Sankyo did not conduct thorough due diligence on Ranbaxy, and in its quest to buy a mature company with a significant presence in the generics segment, the company may have overpaid.17 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Within a month of the acquisition, the US Food and Drug Administration banned the import of 30 of Ranbaxy’s generic drugs for manufacturing violations and also accused Ranbaxy of selling misbranded pharmaceuticals The company has subsequently experienced delays in getting regulatory approval to sell other drugs in the US The US Justice Department has since filed a proposed settlement with Ranbaxy, and the company has set aside US$500m for liabilities connected to the inquiry All this points to the fact that there are risks involved with mergers and acquisitions in an industry with varying national regulations, and quality and safety standards Case Study: AstraZeneca AstraZeneca: Emphasis on innovation AstraZeneca, a global biopharmaceutical company, saw Asia Pacific sales rise more than 7% in 2011 to reach US$6bn Mark Mallon, the firm’s regional vice president of Asia Pacific and president of China, says Asia is “a fundamentally attractive, high growth region” for the pharmaceutical industry Over the next few years, he expects the sector to experience strong double-digit growth in emerging markets such as China, Vietnam and India, and low single-digit growth in the more mature markets such as Australia, Japan and Taiwan According to Mr Mallon, competition in the pharmaceutical sector in Asia has intensified as major pharmaceutical companies step up their investments in the region across sales and marketing, R&D, and manufacturing He expects this trend to continue “Competition from generic firms has also increased, both in established and emerging markets,” he says In his view, competition from Asian pharmaceutical firms tends to be more intense in markets and segments with a high generics penetration Mr Mallon emphasises that profitability in the industry has been driven by innovation—both in terms of new products and new commercial models—and a growing focus on costs He adds that “Asia’s strong history of innovation presents an environment where creativity can flourish” AstraZeneca, he says, is innovating across a broad range © The Economist Intelligence Unit Limited 2012 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” On a related note, Mr Mallon also believes it is important for the industry to address the growing needs of payors and to improve access to medicines There is “an under-served population of people who can only access limited healthcare infrastructures and have a limited ability to pay for medicines,” he says For example, in China most of the company’s business currently comes from hospitals in 200 of the largest cities of more than 1m people Nearly 900m people live outside these cities and the Chinese government is providing major investment to improve healthcare in these communities “We want to be part of this broader market and build a sustainable business in serving those people,” he says In order to so, the company is working with the China Health Promotion Foundation and the Ministry of Health to improve community healthcare by strengthening the training of its general practitioners It is also sponsoring a three-year programme that will train 30,000 doctors so they can better treat some common chronic diseases Reaching out to underserved segments of the population is perhaps not only a moral imperative for some pharmaceutical firms, but can also prove strategically astute, as they seek to improve ties with governments and regulators in the region, and grow the overall market 17 Asia Competition Barometer: Pharmaceuticals Case Study: Lonza Lonza: Focus on quality Lonza, a Swiss chemicals and biotechnology firm whose products feed into the pharmaceutical, healthcare and life sciences industries, built its first Asian plant in China 15 years ago Since then, the firm’s production and R&D network in the region has grown consistently, says Michael Brown, vice president of operations at Lonza Biologics in Singapore Over the last ten years, Lonza has invested about CHF1bn (US$1.1bn) in Asia Some 1,400 of its 11,000-strong global workforce are based in the region today Asia contributes 14% of Lonza’s overall revenues and this is expected to rise to 20% by 2015 For its chemical manufacturing business, Asia represents “a significant platform of growth for its existing and niche technologies,” Mr Brown says But in terms of the market for new biologics, aside from Japan—one of the seven biggest markets worldwide—demand in Asia is relatively small “However, domestic Asian markets, especially China, are future growth opportunities for new medical entities (NMEs), and also biosimilars and generics,” he adds Mr Brown says that competition in Asia has increased in the small 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 conjugated antibodies, cytotoxics we 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 competition is “still on a learning curve” However, Lonza does expect increased competition from Asian competitors in the life science ingredients business, which supports nutraceuticals Meanwhile, Mr Brown believes that rising incomes in the region are slowly eroding the labour cost advantages that some Asian competitors currently enjoy Additionally, Asian governments are also raising their environmental protection and quality standards This “increasing rigidness coming from regulatory authorities will force Asian competitors to obey strict rules,” he says, hence raising their cost of compliance He expects Asian competitors to invest heavily to upgrade their facilities, further reducing any price advantages they enjoy Over the next five years, Lonza aims to grow its biological development services in Asia by cementing its relationships with traditional pharmaceutical companies and new local companies that are currently expanding in Asia Mr Brown believes that there are an increasing number of firms developing a clinical footprint across the region, and Lonza aims to support their pipelines with its products and services © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Outlook C 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 the growing number of people in it who have better access to healthcare and are willing and able to pay for medicines,” Mr Mallon at AstraZeneca says Additionally, the drive by governments in the region to broaden 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 the incidence of developed-world diseases in the region Together with longer life expectancies and other demographic changes, these trends are rapidly broadening the healthcare needs of the region, driving demand for a range of pharmaceutical products Separately, as in many other industries, Asia has also gradually become a key source of production and R&D for the pharmaceutical sector This trend is likely to continue, owing primarily to lower production costs and increasingly sophisticated R&D capabilities, both underpinned by the huge talent pools around the region Over the next few years, the region’s industry is likely to be shaped by two separate but related competitive trends First is the competition between generics manufacturers and innovative big brand firms, 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, as they seek to exploit complementary advantages Although the jury is still out on the value that may be created—the Daiichi-Sankyo and Ranbaxy deal providing some cautionary lessons—there is a good chance that the sector’s global champions of the future may be the products of partnerships involving Asian firms Second is the tension between small and large Asian firms The sector has witnessed some consolidation in recent years, and there is doubt about the extent to which small firms can compete with larger firms that enjoy scale efficiencies and lower distribution costs Nevertheless, there are © The Economist Intelligence Unit Limited 2012 19 Asia Competition Barometer: Pharmaceuticals 18 “The changing dynamics of pharma outsourcing in Asia: Are you readjusting your sights?”, PricewaterhouseCoopers, 2008 20 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 as research.18 Given Asia’s rapid growth, and the confluence of these different pharmaceutical sector business models in the region, the region is well poised to produce many of the world’s most competitive and innovative pharmaceutical firms of the future © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Barometer methodology T 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 companylevel data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness 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 Barometer examines changing profitability and the competition landscape for the Pharmaceutical sector How we define the pharmaceutical sector? The pharmaceutical sector includes the following: manufacture of basic pharmaceutical products and preparations, and the wholesale of pharmaceutical goods Methodology The Barometer has two dimensions: profitability and market concentration Profitability Index To assess the aggregate profitability of the pharmaceutical sector in Asia, the Economist Intelligence Unit developed a composite index of five ratios that each represent a different aspect of a company’s profitability: • EBITDA margin (%): A measure of a company’s operating profitability It is equal to earnings before interest, tax, depreciation and amortisation (EBITDA) divided by total revenue Because EBITDA excludes depreciation and amortisation, EBITDA margin provides a clearer view of a company’s core profitability 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 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 22 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% © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals To assess market concentration, the Economist Intelligence Unit calculated the Herfindahl-Hirschmann Index (HHI) for the Pharmaceutical sector in Asia from 2004 to 2009 A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms from the universe of over 350 listed companies assessed.19 HHI values can range from to 1.0, moving from an extremely fragmented market (0) to a monopoly (1) HHI values have been multiplied by 100 to achieve a scale consistent with profitability indicators A rising HHI index generally indicates falling market competition, while a fall in the HHI suggests that competition is increasing © The Economist Intelligence Unit Limited 2012 19 Or summed for all the firms in the case that there are fewer than 50 23 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out herein [...]... Limited 2012 Asia Competition Barometer: Pharmaceuticals Barometer methodology T 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 companylevel data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select... growing pie by increasing their product offerings and expanding to rural areas © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Case Study: Glenmark Pharmaceuticals Glenmark Pharmaceuticals: The benefits of longstanding presence Glenmark Pharmaceuticals, an Indian pharmaceutical company with operations in specialty, generics and out-licensing, has seen sales increase... 2012 15 Asia Competition Barometer: Pharmaceuticals 14 “Pfizer trims 2012 view, citing stronger dollar”, Reuters, Jan 31st 2012 15 “AstraZeneca plans to cut 7,300 jobs”, The Wall Street Journal, Feb 3rd 2012 16 “Teva eyes more acquisitions in Asia , Pharma Times, Jan 12th 2012 17 “Daiichi Yet to Gain from Ranbaxy Buy”, The Wall Street Journal, Mar 16th 2011 16 be a huge driver for the sales of Asian... “In areas like peptides, 18 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 competition is “still on a learning curve” However, Lonza does expect increased competition from Asian competitors in the life science ingredients business, which supports nutraceuticals... partnerships involving Asian firms Second is the tension between small and large Asian firms The sector has witnessed some consolidation in recent years, and there is doubt about the extent to which small firms can compete with larger firms that enjoy scale efficiencies and lower distribution costs Nevertheless, there are © The Economist Intelligence Unit Limited 2012 19 Asia Competition Barometer: Pharmaceuticals. .. strategic acquisitions of generics manufacturers in 10 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals the region They will be challenged by several Asian pharmaceutical manufacturers who are fighting for a bigger share of the generics market Meanwhile, smaller Asian pharmaceutical firms will compete to provide specific services, such as contract manufacturing... EBITDA margin provides a clearer view of a company’s core profitability 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 Asia Competition Barometer: Pharmaceuticals profitability considering only the costs of goods sold The higher the... The Economist Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals To assess market concentration, the Economist Intelligence Unit calculated the Herfindahl-Hirschmann Index (HHI) for the Pharmaceutical sector in Asia from 2004 to 2009 A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as... ties with governments and regulators in the region, and grow the overall market 17 Asia Competition Barometer: Pharmaceuticals Case Study: Lonza Lonza: Focus on quality Lonza, a Swiss chemicals and biotechnology firm whose products feed into the pharmaceutical, healthcare and life sciences industries, built its first Asian plant in China 15 years ago Since then, the firm’s production and R&D network... prevalent in a few countries where government buys most of the drugs “They issue tenders and these are very price-competitive,” he says, pushing down profitability 13 Asia Competition Barometer: Pharmaceuticals Positioning for success in Asia Sustained growth O 7 “India’s pharmaceutical industry on course for globalization”, Deutsche Bank Research, Apr 9th 2008 ver the next few years, global pharmaceutical ... Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Case Study: Glenmark Pharmaceuticals Glenmark Pharmaceuticals: The benefits of longstanding presence Glenmark Pharmaceuticals, an... Limited 2012 Asia Competition Barometer: Pharmaceuticals Outlook C ontinued economic growth in Asia has led to increased household incomes and spending on healthcare and pharmaceuticals “In Asia, clearly... Intelligence Unit Limited 2012 Asia Competition Barometer: Pharmaceuticals Asia s growing importance for corporate performance and global competitiveness O ver the past decade, Asia has rapidly grown