LONDON-AstraZeneca plans to broaden its presence across a wide range of developing markets, including small and mid-sized ones, not only to maximize growth but also to smooth out variations in growth rates across countries and regions, top company executives said in a detailed presentation to analysts on March 16.
The company will emphasize branded generics. Although AZ doesn't expect branded generics to account for more than 10-15 per cent of its emerging market sales by 2014, "in absolute terms, it's an area of significant growth, even if it's not the largest segment" [of emerging markets business] said CEO David Brennan during a Q&A session after the presentation.
Branded generics offer the opportunity to sell older, off-patent drugs-including others' drugs-at relatively high prices, in areas where brand loyalty and company reputation remain strong drivers of uptake.
The company has identified 100 compounds that it would like to commercialize in 30 markets, focusing on those with a relatively high private-pay segment and brand loyalty. The products in question will, where possible, fit with AZ's existing therapeutic area foci. The Big Pharma on March 11 bought from India's Torrent Pharmaceuticals rights to 18 products, which it plans to sell as branded generics in nine territories ('PharmAsia News, Mar. 11, 2010), and the partners have leeway to expand the deal, according to Brennan.
The Branded Generic Growth Opportunity
AZ isn't alone in identifying branded generics as an important, if not the most significant, element of emerging markets growth. Sanofi Aventis has been actively acquiring in this space; meanwhile much of the drive behind Pfizer's bid for Germany's number two generics firm, ratiopharm, allegedly comes from its plan to push several hundred branded generics across multiple developing markets ('The Pink Sheet,' Mar. 15, 2010).
"Ninety percent of the emerging markets in value terms is branded," observed Philip Burchard, AstraZeneca's regional VP, Latin America, who will from April become the company's SVP, Commercial Operations (another reflection, perhaps, of the strategic importance of emerging markets).
AZ highlighted Poland and Mexico as two markets in which structure and dynamics make branded generics particularly profitable. Three-quarters of the Polish market by value is branded and off-patent, according to Jerzy Garlicki, President of AstraZeneca Pharma Poland. The branded generics market is estimated at $4.6 billion according to IMS, or almost 40% of total prescription drug sales. The reasons: a high degree of brand preference and limited pharmacy switching in Poland, where doctors remain the key decision-makers, unlike in most Western markets.
And although government is the primary payer, patient co-pays in Poland remain high. That props up branded generic prices, which Garlicki says are at only a small discount to original drugs. Branded generics in Poland are thus expected to continue growing at 5-6 percent per year, said Garlicki.
But although AZ management described launching products in Poland as "relatively easy", using Europe's mutual recognition procedure, the company isn't planning to flood the market, reflecting its focused strategy in this segment. "We are being smart about how we introduce branded generics, selecting only those drugs which allow us to leverage existing strengths, for instance in our existing core therapeutic areas," Garlicki told the meeting. The result: just 25 drugs planned to launch by 2015, at which point 20 percent of AZ's Poland revenues (worth $133 million) will be from branded generics.
The story's similar in the $10 billion Mexican market, where branded generics prices are higher than average because it's a mostly self-paying set-up, with both doctors and patients showing strong brand preference. There, too, though, the company has chosen products which allow it to take advantage of existing infrastructure and competencies, minimizing cost and maximizing margins. AZ's 2009 sales in Mexico, where it claims to be ranked eighth, were $261 million.
Small and Mid-Sized Markets Matter, Too
Neither Poland nor Mexico are huge markets, but singling these out reflects the second pillar of AZ's emerging markets strategy, which is to increase its footprint in high-growth small and mid-sized markets."The BRIC MT (Brazil, Russia, India, China, Mexico, Turkey) markets represent only 50 percent of the market; so we need to take small- and mid-sized markets seriously, too," said Burchard ('The Pink Sheet' DAILY, Mar.16, 2010). He claims that the smaller Latin American markets, for instance, will add $11-15 billion in absolute growth by 2014.
They'll also help provide AstraZeneca with a wider geographic 'portfolio' to help smooth out any volatility in growth across the other developing markets. "This portfolio effect is key to achieving sustained strong growth," Burchard said. AZ continues to grow its presence in the larger developing markets too, however.
Not all companies can afford the infrastructure and investment costs required for such a wide presence. Mid-sized UCB, for instance, under significant revenue pressure from patent expiries, was forced to cut back its geographic footprint in 'non-strategic' emerging markets, enabling GlaxoSmithKline to scoop up the assets and infrastructure for €515 million ($670 million) in January 2009.
Operating Margins Improving Thanks to Financial Discipline
Not that AZ, management says, is throwing money into emerging markets willy-nilly, even though these are forecast to account for 70 percent of overall pharmaceutical growth over the next five years, according to IMS. The company claims that despite lower drug prices overall, its operating margins in these markets have improved from 55 percent of those (pre-R&D) margins in established markets in 2004 to 72 percent today. According to Bruno Angelici, EVP, Europe, Japan, Asia-Pacific, Latin America, Middle East & Africa, that's largely down to local financial discipline, as well as being a first mover in key markets like China, and establishing best-practice management in areas such as sales force effectiveness, marketing and market access. He also points to cheaper and more flexible manpower: it's far easier to downsize in developing markets than it is in, say, Germany or Italy.
And although AZ has increased its emerging markets headcount by almost threefold to 14,000 in the last five years and plans to hire "hundreds" more this year, the spending is partly offset by cuts in North American and Western European sales forces, says Angelici. "We can re-allocate resources."
Choosing carefully the right segments in which to compete in each market can also help maximize profitability: Angelici pointed as an example to the Chinese calcium channel blocker market. Here, in a strongly brand-drive market, 65 percent of the value derives from just 30 percent of the drug volume-in branded originals and branded generics
In sum, "the return on invested capital [in emerging markets] is close to what we get in developed markets," claimed Brennan in response to an analyst question; "we wouldn't do it if it wasn't reasonable."
Emerging Markets Will Generate 25 Percent of AZ Sales by 2014
AZ's focus on emerging markets isn't new, indeed the company claims to have been among the first to articulate its emerging markets strategy to investors, back in 2004. Despite that, AZ's forecast that a quarter of its global revenues will come from emerging markets by 2014, up from 13 percent in 2009-hardly first place among its Big Pharma peers. Sanofi Aventis and Novartis already derive about 25 per cent of overall sales from emerging markets, although they have pursued a more diversified strategy than AZ, with growing businesses in consumer products and vaccines, for instance.
Emerging markets will remain a key part of all mid-cap and large drug firms' growth strategies, whether they're pure-play or diversified. These markets, after all, offer respite from one of the key challenges facing Western markets right now: patent expiries. Drug sales in China and other developing markets continue to grow well after patent expiry. AZ's proton-pump inhibitor Losec (omeprazole) for instance, is growing strongly in China, at about 16 percent per annum, despite having lost protection in 2001, and despite over 130 competitors.
"It's fascinating to watch Losec still growing," said Angelici. "It illustrates the concept of long-life-cycle that products enjoy in these markets."
- Melanie Senior (m.senior @elsevier.com)
