Posted June 10, 2014 10:59 pm by Comments

Pharmaceutical Executive has a must read article (Surviving the Price Wars in Emerging Markets: Three Myths and Three Lessons) for investors trying to figure out how their pharma stocks are navigating the difficult terrain of selling often expensive drugs in emerging markets. The article began by noting that:

  • Bayer AG (OTCMKTS: BAYRY) and Sanofi SA (NYSE: SNY) are succeeding because emerging markets already account for 30% of their revenues.
  • Retail sales of pharmaceuticals in Brazil surpassed those of key developed markets like Canada and the UK in 2010 and continue growing at double-digit rates – meaning pharma companies can’t ignore emerging markets. 
  • Most drug business in emerging markets originates from patients paying out-of-pocket. For example: In India, more than 95% of the pharmaceutical expenditure is out-of-pocket while in China and Brazil, patients pay 65% and 80% of the cost of medicines out-of-pocket, respectively.

The article goes on to explain that many pharma companies are struggling to maximize their profitability in the out-of-pocket market as the patient is the main decision-maker, there is a lack of regulated margins, sales tend to originate from only a few key accounts in the distribution channel (e.g. large retailers who can force steep discounts) and there is fierce competition from established local generics.

Pharmaceutical Executive then deconstructed and provided examples of why the following statements are myths (meaning they should be kept in mind if you hear in an earnings call or somewhere else of a pharma company pursuing these strategies) when it comes to selling drugs in emerging markets:

  1. 1st myth: “Low prices will drive volume and therefore profit.” 
  2. 2nd myth: “Our competitor started the war, so we should react by lowering our prices.”
  3. 3rd myth: “When the war ends, we will increase the prices.”

Finally, Pharmaceutical Executive suggested some pharma drug pricing strategies in emerging markets with one of the accompanied antidotes being the following:

An example of a company that successfully addressed ruinous competition between its customers is AstraZeneca plc (NYSE: AZN) in Mexico. In 2009, the company came up with a disruptive solution to put an end to increasing demands for discounts from competing distributors. A uniform retail price across Mexico was introduced, a move that favored small pharmacies and limited further concentration of buying power. Exclusive distributors were paid a fee for service instead of working based on margins. Wal-Mart was initially lost as a client, but now most of the MNC pharmaceutical companies have switched to this business model as well.

To read the whole article, Surviving the Price Wars in Emerging Markets: Three Myths and Three Lessons, go to the website of Pharmaceutical Executive.

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