beyondbrics

Western pharmaceutical companies have been revealing more about their activities in emerging markets – and now they’re starting to see the benefits of that transparency.

One London broker decided to upgrade GlaxoSmithKline this week following the release of more details about its sales in emerging economies, a move that highlighted the importance analysts are attaching to the industry’s expansion outside its traditional markets.

Until recently, emerging markets were largely an optional extra dismissed by western analysts who best understood and focused on drug sales in the world’s established markets: North America, western Europe and Japan. Further afield they were suspicious of the data, the assumptions and the impact on overall business.

But in the last couple of years, a number of drug companies – notably those based in Europe with a long history of geographical expansion away from their small and competitive home markets – have begun to change attitudes.

For GlaxoSmithKline, the reward came when UBS upped its 12 month price target for the company’s shares to £16.50 following the UK drug maker’s publication of data showing its product-based sales across the world for 2008 and 2009. The bank has upgraded its 2015 sales estimates as a result by £1bn.

AstraZeneca now includes sales from China – where it is one of the market leaders – as a separate line item in its accounts. It, as well as Sanofi-Aventis and GSK, have also hosted emerging market-focused investor days, and released much more detailed data.

Analysts have begun to respond with a fresh look, which is already spurring greater investor interest. “Reratings were substantially a result of the increased emerging markets disclosure,” says Gbola Amusa, a UBS pharmaceutical analyst who coordinated the report and predicts a further upgrade for GSK.

With western markets stagnating as healthcare systems resist high-priced new drugs, companies are re-examining their business models.

Much healthcare in emerging markets has long been paid for out of patients’ own pockets and in the past the only market for western drugs was the small number of wealthy individuals who lived there.

But now several factors are changing that: the expansion of the middle class; the growth in state or insurance-backed health systems in countries such as China; and the potential to trade off lower prices against higher volumes (known as “differential pricing”).

Add it all together and emerging markets have great potential to help offset waning growth in western markets.

IMS, a healthcare consultancy, predicts that China will by next year overtake France and Germany to become the world’s third-largest prescription medicines market after the US and Japan in 2011.

Some companies – such as Roche, with its specialist, expensive treatments for cancer – prefer to maintain western-level prices, fearing that otherwise there could be “leakage” of their products from lower to higher priced markets.

But others like GSK believe that greater “differential pricing” will help to compensate financially. So will synergies linked to their expansion into off-patent generic drugs and consumer healthcare.

For the discerning pharma investor, then, emerging markets are becoming a new point of differentiation.

Related reading:
East offers prescription for west’s plans, FT