The Emerging Markets of the East

Leaders from Brazil, Russia, India, and China, also known as the BRIC nations, met in Yekaterinburg, Russia, this past June at the first formal emerging economies summit. The group of nations is expected to surpass the current leading economies by 2050 (1), and the pharmaceutical industry is paying attention. IMS Health projects pharmaceutical sales in the so-called pharm-erging markets (the BRIC nations plus Mexico, South Korea, and Turkey) to grow collectively at 13–16% in 2009 and through 2013, according to April 2009 estimates. Meanwhile, the global pharmaceutical market is expected to grow by only 2.5–3.5% for 2009, and only 3–6% through 2013, with US pharmaceutical sales declining 1–2% this year.

With so much promise in developing pharmaceutical markets, small and large companies as well as contract research and manufacturing organizations (CROs and CMOs) are seeking a piece of the warming pie. Although China and India remain hot spots for industry growth, Central and Eastern Europe (CEE), along with the neighboring Commonwealth of Independent States (CIS) (see sidebar, "The region"), constitute a region to contend with.

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CEE offers market advantages

After having lost ground during the past 20–30 years, European active pharmaceutical ingredient (API) producers, specifically in CEE, seem to be rebounding. It's well known that API manufacturers in Europe have been squeezed out by competition from China and India as a result of Europe's more prohibitive operating costs for the good-manufacturing-practice (GMP) compliant production of off-patent APIs (typically, 25% of site operating costs) and increased regulations, says Agnieszka Stawarska, a pharmaceutical market analyst at PMR. A market-research firm based in Poland, PMR issued a report on the CEE pharmaceutical market, "Pharmaceutical Contract Manufacturing and API Sourcing in Central and Eastern Europe," in January 2009. The number of companies throughout Europe that offer contract manufacturing services, including API production, is also quite low in comparison with the number of companies operating in China and India.

But after a series of supply-chain breaches such as the contaminated heparin event and a high percentage of reported incidences of counterfeiting in China and India, global firms are taking more notice of the CEE region's advantages. For starters, "CMOs and API suppliers in Europe are located much closer to their clients in comparison with CMOs and API suppliers that come from China and India, which translates into lower transportation costs," explains Stawarska. Moreover, most companies in CEE are GMP-compliant, she says, whereas most companies in China are not. There are an estimated 5000 rogue API manufacturers in China, Stawarska explains, and about 3000 of them are not Chinese GMP-compliant.

In comparison with Western Europe, production costs in the CEE region are still lower, and wages are between one-quarter and one-sixth of those in Western Europe. On the other hand, CEE companies do not have a long tradition of cooperation with companies from Western countries.

Currently, "the most attractive countries in the CEE region for finding partners for contract manufacturing and API sourcing are the Czech Republic and Poland," says Stawarska. Home to the sites of the largest API manufacturers in the CEE region—Polpharma (Starogard Gdanski, Poland) and Zentiva (Prague), which was acquired by sanofi aventis (Paris) in September 2008, these two countries offer an abundance of qualified scientists and high levels of investment into the domestic pharmaceutical market. The Czech Republic and Poland even have more companies specializing in API production than Russia, which is surprising given Russia's size and market potential, says Stawarska.

Neighboring Hungary, however, has been losing favor among international players because of its government's recent cost-cutting measures and their effect on the country's business environment, she says. So pharmaceutical firms based in Budapest such as Egis and Gedeon Richter, which have provided pharmaceutical production and drug-development services for decades, are losing some ground.

Gedeon did, however, invest HUF 15 billion ($103.7 million) in a new manufacturing plant for biopharmaceutical products, including mammalian-cells and therapeutic proteins, in Debrecen, Hungary, in July 2008 (2). The plant, which will create 110 new jobs, is expected to be operational in 2012, starting with clinical trial materials and moving to commercial-scale production in 2014.

Among BRIC nations, Russia holds #2 spot

Russia's pharmaceutical sales grew by approximately 20% between 2006 and 2007 to $7.9 billion, according to IMS Health, beating out its BRIC competitor nations Brazil, which grew 9.7%, and India, which grew 13%, over the same period (3). Russia's pharmaceutical sector is also expected to grow by 2% in 2010 and could recover from the global recession faster than other markets, according IMS Health. There are a few reasons Russia may be ahead, according to David Campbell, senior principal at IMS Consulting.

Historically, Russia's scientific sector has always been very strong and, because several companies identified the Russian market early on, the country has remained favorable for low-valued generic drugs, he says. The country is also considered a good bet for sourcing innovative pharmaceutical products and as a place of opportunity for imported pharmaceutical products.

Domestically, there is a lot of out-of-pocket cost for individuals buying medications in Russia, but a significant portion of the population is reimbursed by a government agency or another insurance system. "As a whole, the Russian market does well from this perspective," says Campbell.

Russia's overall economy also may explain why its pharmaceutical sector is likely to pick up faster than other markets, starting as soon as 2010. According to the Economist Intelligence Unit, says Campbell, oil prices may rise to $50–52 per barrel by the end of this year. In addition, Russian consumers are in a safer place financially than their counterparts in other countries because of low household debt and a small mortgage market, among other factors. A government stimulus package is cushioning the effects of the global recession, and finally, there is now a lower tax burden on some sectors.

Unlike Brazil and India, Russia does not have major issues with distribution channels, access, or intellectual property, says Campbell. "These simple challenges have prevented [Brazil and India] from growing as rapidly as the Russian market," he says.

China, on the other hand, has remained the BRIC leader (with growth of nearly 26% between 2006 and 2007) because of its large-volume market and its huge opportunities for innovative and generic products as the population turns away from Traditional Chinese Medicines and toward Western medicines, explains Campbell. In addition, China's infrastructure and distribution are more mature than in the other BRIC markets, and access is critical to market success, he says.

Looking ahead, Russia's domestic pharmaceutical sector is transforming. "We're seeing two things happening," says Campbell. "First, Russian physicians are increasingly open to prescribing highly innovative products. Second, the proportion of patients that have a need and desire to access these high-value innovative medications that weren't traditionally available is growing." Overall, the population at large is starting to feel that cheaper products and preparations are not necessarily what they want.

The government is also determined to change the way the pharmaceutical industry operates. With the recent currency devaluation, oil-price drops, and credit-crunch, the Russian government has spent most of 2009 working on pricing-control measures across the pharmaceutical sector, says Campbell. Specifically, they are changing various reimbursement lists to ensure that the government can meet the needs and expectations of the population. They also want to ensure that the country's life expectancy, which until recently was very poor (In 2007, life expectancy was age 66 in Russia and 80 in the European Union), continues to improve. "To do so, the government will have to invest in healthcare going forward," says Campbell.

The government wants to increase local pharmaceutical manufacturing, but what that means exactly (e.g., APIs, finished products, packaging)—and how it will be managed (e.g., tax rebates) remains to be seen. "Several pharmaceutical companies are looking at this intently and are concerned about the implications going forward," says Campbell. "We may see more strategic partnerships between local players and multinationals or multi-nationals moving manufacturing capabilities into the country in response."

References

1. A.E. Kramer, "Emerging Economies Meet in Russia," New York Times, June 16, 2009.

2. Gedeon Richter Press Release, July 22, 2008, www.richter.hu/EN/Pages/pressrel080722.aspx, accessed Aug. 28, 2009.

3. A. Drakulich, "A Reality Check on Emerging Markets," Pharm. Technol.32 (7), 54–56 (2008).

For more on this topic, see the online exclusives "Multinational Firms Stake Claims", "CROs and CMOs Go Further East", and "Standard-Setting Bodies Engage Russia"