Health-care companies facing a host of profit-threatening conditions—such as pricing pressures, patent expirations and sluggish economic growth in mature markets—are beginning to build some immunity by boosting their exposure to the developing world.
According to Julia Giguere, a senior analyst who covers the health-care sector for MSCI ESG Research in Boston, developing countries are experiencing stronger economic and population growth than the developed world. They also boast rising middle classes and they increasingly need products that can address shifting disease burdens. Those factors should attract health-care companies, despite the challenges of dealing in these markets (the physical infrastructure of these countries is poor, and they often pursue protectionist economic policies).
“Companies need to start positioning themselves sooner rather than later to gain footholds in emerging markets for long-term growth,” says Giguere. “Health care is behind the curve compared to other sectors.”
For example, the top 20 health-care companies by market capitalization generate just 18% of their revenues in non-developed markets. Meanwhile, companies in the financial, consumer and telecommunication sectors generate an average of 39%, according to the report, Creating Value in Underserved Markets, co-authored by Giguere and published by MSCI ESG Research in March 2013. The pharmaceutical industry is the outlier, far outpacing other parts of the health-care sector in these markets, she notes.
It’s also picking up speed. The IMS Institute for Healthcare Informatics says that by 2016, 17 markets it identifies as “pharmerging markets”—including China, Brazil, India and Russia—will account for 30% of annual global spending on medicines, up from 20% in 2011 and 14% in 2006. Driving this growth will be rising incomes in these markets, the continued low cost for drugs and government-sponsored programs designed to increase access to medicine, according to the institute’s report, The Global Use of Medicines: Outlook Through 2016. At least one-third of the world’s population lacks regular access to medicines, according to the World Health Organization (WHO).
Some drug companies have recently formed specific operating units for the developing world as a more organized way to combine their business goals with initiatives to provide more drug access. A number of them are also broadening their prescription drug portfolios and expanding their consumer health-care businesses to reach growing middle-class populations.
Among them is British drug maker GlaxoSmithKline, which has made investments to increase its exposure in vaccines, pharmaceuticals and consumer health care in emerging markets. Its total sales in emerging markets grew 10% in 2012 to account for 26% of its business. GSK’s Developing Countries Market Access unit, which manages its commercial business in the world’s 50 poorest countries through a lower price/higher volume business model, saw unit sales increase 61% in 2012.
It’s too soon to know how the Chinese government’s recently launched investigation of GSK for alleged bribery and corruption will play out. But the company took top place in the 2012 Access to Medicine Index (ATMI), a biennial ranking of the 20 largest research-based pharmaceutical companies’ efforts in the developing world. The index considers companies’ attributes such as their performance and innovation in R&D, their pricing, their manufacturing and distribution strength, their patents and licensing and their public policy and market influence. MSCI ESG Research was the research partner for the first three iterations of the index, which was first launched in 2008.
“GSK is currently the leader in the space, and it has been for a while,” says Giguere. “It strategically targets growth in emerging markets and has consistently outpaced other companies over time.” Among other things, the company has equitable pricing models and one of the most expansive R&D pipelines for diseases afflicting people in developing countries, she says. GSK’s American depositary receipts (ADRs) trade on the New York Stock Exchange under the symbol “GSK.”
Following GSK on the 2012 Access to Medicine Index are Johnson & Johnson, Sanofi SA, Merck & Co., Gilead Sciences, Novo Nordisk A/S and Novartis AG.
Emerging markets sales have been particularly strong for French drug maker Sanofi, accounting for 31.9% of its total sales in 2012. The company achieved double-digit sales growth in Latin America, Asia, Africa and the Middle East. Sanofi, whose ADRs trade on the NYSE under the symbol “SNY,” anticipates continued strength.
“In China and India, 400 million people are expected to join the middle class before 2020, and all of them will be looking for better health care for their families,” said Sanofi CEO Christopher Viehbacher in the company’s 2012 annual review. Sanofi’s animal-health business also has strong growth potential in emerging markets, he said, since a growing middle class is likely to keep more pets and consume more quality protein foods like meat, eggs and fish.
Currently, Sanofi is stepping up efforts to treat diabetes in emerging markets, where it says two-thirds of new cases are expected to occur with people’s changes in lifestyle and consumption habits. Sales for one of its insulin products grew 25.4% in the emerging world last year.
Other drug makers are also extending their focus beyond the three pandemics (HIV/AIDS, tuberculosis and malaria) to noncommunicable diseases and chronic conditions on the rise in developing nations—things such as diabetes, heart disease, asthma and cancer, says Lauren Compere, a managing director and director of shareholder engagement for Boston-based Boston Common Asset Management LLC.
For example, Swiss drug maker Roche Holding AG, the global leader in oncology (its ticker is “ROG” on the SIX Swiss exchange), already gets one-fifth of its sales from emerging market nations in Asia and Latin America and is actively expanding its position in them to improve access to its medicines and diagnostic products. It is also working hard to improve access to cancer education and has given much attention to a very aggressive form of breast cancer that has emerged in China, she says.
Meanwhile, Danish drug maker Novo Nordisk, the world’s largest diabetes-care company, is getting a larger percentage of its business from low- and middle-income countries where it sells insulin at a discount. Its sales in China—where more than 90 million people have diabetes—jumped 28% in 2012 and account for a 37% share of the country’s diabetes market in terms of value. The company’s ADRs trade on the NYSE under the symbol NVO.
Since generic drugs are expected to drive much of the spending increases in the developing world, this could bode well for Swiss drug maker Novartis. Its Sandoz division, the world’s second-largest generic drug maker, saw 2012 sales growth of 29% in Brazil, 27% in China, 15% in Russia and 30% in Turkey. Sandoz is also expanding its presence in Africa.
Novartis was dealt a blow in April when the Supreme Court of India denied it a patent for the company’s cancer drug Glivec. Although the company said this discourages future innovations in India, it plans to continue to distribute Glivec there through its oncology access programs. Meanwhile, Arogya Parivar, Novartis’s for-profit social initiative designed to reach millions of people living at the bottom of the pyramid in rural India, has seen sales increase 25-fold since 2007. The initiative provides health education programs, disease prevention and treatment options, improved access to medicines and jobs. Compere describes Novartis’ approach to rural health needs in India as a best practice model. Its ADRs trade on the Nasdaq under the symbol “NVS.”
Targeting the right diseases is critical for companies interested in helping people and profits in the developing world. To evaluate impact, MSCI ESG Research first defines the high burden diseases in developing market countries by looking at disability-adjusted life years—the number of years of life lost due to poor health, disability and early death. It then examines a company’s strategies for addressing these diseases, including its R&D, commercially available products and the product prices.
Not every initiative to give people access to medicine will pay off immediately, or even at all. An ongoing dilemma is how to turn a profit on medicines that people in the poorest countries can’t afford. That is why many pharmaceutical companies have stayed away from more than a dozen painful, debilitating, neglected tropical diseases (NTDs) that affect more than 1 billion people worldwide, including dengue, lymphatic filariasis, leprosy and river blindness.
Fortunately, the 2012 London Declaration on NTDs is bringing more attention to these diseases, which, in turn, can help build a better business case for R&D, says Compere. Many drug makers have endorsed this public initiative, which calls for the reduction or eradication of some of these diseases and encourages collaboration, which can cut costs. Such efforts can also give companies access to fast-growing emerging markets where they can build brand loyalty and potentially sell more profitable drugs, say industry experts.
New York-based Domini Social Investments, like Boston Common Asset Management, is interested in investing in pharmaceutical companies that balance public health interests with profits. One of these is Mylan Inc. (Nasdaq: MYL), a U.S. generic and specialty drug maker that markets products in approximately 140 countries and territories. It was the fifth-largest holding in the Domini Social Equity Fund as of June 30. Nearly 40% of HIV/AIDS patients in developing countries depend on Mylan’s generic antiretroviral therapies, notes Tessie Petion, vice president of responsible investment research for Domini.
She notes that Gilead Sciences (Nasdaq: GILD), a U.S. biopharmaceutical firm, has also made strong efforts in developing markets. It gets over 80% of its revenues from HIV/AIDS products and has developed a tiered pricing model to make them more affordable to people in these markets. Gilead was the first drug maker to join the Medicines Patent Pool, a United Nations-backed initiative to facilitate the sharing of patents. It has also granted many companies licenses to produce generic versions of its HIV medicines for low- and middle-income countries.
To date, companies focused on biologics—medicines largely derived from living cells—have not been as involved in developing countries because their products tend to be pricier (some of these drugs can cost a person $50,000 per year) and are harder to duplicate, says Petion. “Once they can be replicated for substantially less, I think we’ll see the movement into the developing markets,” she says.
Similarly, medical device and medical equipment makers have been slow to enter the developing world because their products tend to be expensive and because there is a shortage of skilled professionals in those markets who can work with such devices, says Petion. But she plans to watch the way some of these companies approach the growing middle-class markets in these countries in the future.
Becton, Dickinson and Co., or BD (NYSE: BDX), is currently the leader among medical device and medical equipment companies in developing markets, says Giguere. It has developed diagnostic testing for TB and HIV, has strong capacity-building initiatives and targets Sub-Saharan Africa, she notes.
Emerging markets accounted for 23% of company sales last year. Its sales in China grew 24.8% in 2012, and BD says it sees promising opportunities in India, Vietnam, Indonesia and Latin America. The company is also extending its reach into lower-priced emerging market segments with more price-competitive products, including a new line of syringes.
Meanwhile, drug makers AstraZeneca PLC and Merck KGaA (often referred to as “German Merck”) are innovators in developing devices to help detect counterfeit medicines. The up-front costs of such devices are low when compared with the costs of bringing a drug to market, and there is a strong need for the devices since counterfeiting is a big problem in developing markets, according to Giguere. AstraZeneca’s ADRs trade on the NYSE under the symbol “AZN.” Merck KGaA trades on the Frankfurt Stock Exchange.
The developing world is not easy to navigate, but there are plenty of health-care opportunities. Even seemingly small steps are important, such as using pictograms on packaging in places where literacy rates are low, says Giguere. She says companies looking to improve health in these countries should partner with all the key actors, including local governments and NGOs, to better understand the markets and how products are used in them.