Asia competition barometer pharmaceuticals

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—

An Economist Intelligence Unit report

Supported by

© The Economist Intelligence Unit Limited 2012 1

Contents

Preface 2

Asia’s growing importance for corporate performance and global competitiveness 5

Case study: Glenmark Pharmaceuticals 13

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

Preface

© The Economist Intelligence Unit Limited 2012 3

•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

•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 5

Asia’s growing importance for corporate

performance and global competitiveness

2001

Source: BPS; China National Bureau of Statistics; EIU; US Bureau of Census

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 2: Life expectancy

(years)

0 20 40 60 80 100

Vietnam Thailand

Singapore Philippines

Malaysia Indonesia

India China

Indonesia Taiwan

Philippines Japan

Australia India

Thailand

S Korea Malaysia Sri Lanka

2010 2030

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 7

Figure 4: Healthcare spending

(per head, US$)

Singapore Philippines

Malaysia Indonesia

India China

2010 2030

Note: Total public and private expenditure on health, per capita.

Source: Epsicom; WHO; EIU

“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 9

Competition and profitability at Asian firms

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.

Figure 5: Herfindahl–Hirschman Index

1.00 1.25 1.50 1.75 2.00

2009 2008

2007 2006

2005 2004

Source: Economist Intelligence Unit

2004 2005 2006 2007 2008 2009

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

Figure 6: Top ten companies by turnover Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)

© The Economist Intelligence Unit Limited 2012 11

2007 2006

2005 2004

Source: Economist Intelligence Unit

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 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

© The Economist Intelligence Unit Limited 2012 13

Case study: Glenmark Pharmaceuticals

Glenmark Pharmaceuticals: The benefits of longstanding presence

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

Vietnam Thailand

Singapore Philippines

Malaysia Indonesia

India China

2010 2016

Source: EIU; Epsicom

Positioning for success in Asia

Sustained growth

Over 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

© The Economist Intelligence Unit Limited 2012 15

9 “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

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

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.14Similarly, 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 do 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