Asia Competition Barometer PharmaceuticalsAn Economist Intelligence Unit report
Supported by
© The Economist Intelligence Unit Limited 2012 1
Asia Competition Barometer:Pharmaceuticals
Contents
Preface 2
Executive summary 3
Asia’s growing importance for corporate performance and global competitiveness 5
Competition and profitability at Asian firms 9 Competition: Marginal decrease in an extremely fragmented sector 9
Profitability:Slowgrowth 11
Case study: Glenmark Pharmaceuticals 13
Positioning for success in Asia 14 Sustainedgrowth 14
PatentexpirationswillleadtomorepartnershipsinvolvingAsiangenericsmanufacturers 15
Case Study: AstraZeneca 17
Case Study: Lonza 18
Outlook 19
Barometer methodology 21
© The Economist Intelligence Unit Limited 20122
Asia Competition Barometer:Pharmaceuticals
SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
ThisreportfocusesontheBarometerfindingsforthepharmaceuticalsector.Assessingauniverseofover350pharmaceuticalcompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthepharmaceuticalsector.
Otherreportsinthisserieslookattheinformationtechnologyservices,precisionengineering,transportandlogistics,andpetrochemicalsandchemicalssectorsinAsia.
March 2012
Preface
© The Economist Intelligence Unit Limited 2012 3
Asia Competition Barometer:Pharmaceuticals
Executive summary
WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth
prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals(MNCs).Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthopportunitiesoverthenextfewyears?
TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminesthepharmaceuticalsector,whichincludesthemanufactureofbasicpharmaceuticalproductsandpreparations,andthewholesalingofpharmaceuticalgoods.
Amongthekeyfindingsofthisreportarethefollowing:
• Asia’s pharmaceutical sector has been expanding rapidly, in line with the region’s strong economic growth and demographic changes.Severalbroadtrends,includingrisinghouseholdincomes,increasedgovernmentexpenditureonhealthcare,higherlifeexpectancies,consumerhealthawareness,andthegrowingincidenceofchronicdeveloped-worlddiseasesassociatedwithchanginglifestyleshaveallboosteddemandforpharmaceuticalproductsintheregion.AccordingtotheEconomistIntelligenceUnit(EIU),regionalpharmaceuticalsaleshavemorethandoubledfromUS$97bnin2001toUS$214.2bnin2010.By2016,theEIUexpectssalestohitUS$386bn,reflectinganannualaveragegrowthrateofmorethan13%.
• The number of players, homegrown and global, is rising.Thenumberandsizeofpublicly-listedfirmsinthepharmaceuticalsectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesin
© The Economist Intelligence Unit Limited 20124
Asia Competition Barometer:Pharmaceuticals
theindustryroseby34%between2004and2009,from276firmsto370.TotalcombinedrevenuesnearlytripledfromUS$27.4bntoUS$73bnduringthesameperiod.
• Global companies are investing heavily in Asia across sales and marketing, R&D, and manufacturing.GlobalpharmaceuticalfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestotheregion.Furthermore,whileAsiawasonceviewedasanattractivedestinationonlyforsimpleoutsourcedproduction,theregionisincreasinglyseenasakeyR&Dhub.
• Despite a slight increase in market concentration, competition in Asia’s pharmaceutical sector remains fierce.Amongpublicly-listedAsianfirms,theindustry’slargestplayersincreasedtheirmarketsharebetween2004and2009.However,Asia’spharmaceuticalsmarketremainshighlycompetitiveandextremelyfragmented,withthousandsofsmallermanufacturers.Thebiggestfirmshavebeenabletogrowtheirmarketsharepartlythroughfiercepricecompetition,astheyenjoyscaleefficienciesandlowerdistributioncosts.Risingincomesintheregionhavealsocontributedtoincreasedmarketshareasmoreconsumerscanaffordbrandedpharmaceuticalsandelectivetreatments.Nevertheless,therewillcontinuetobeopportunitiesforsmallfirmsthatcanprovidespecificservices,suchascontractmanufacturingorresearchworkforlargercompanies.
• 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.Forinstance,theaveragecostofemployeesincreasedby50%fromUS$6,000toUS$9,000between2004and2009.The2008globaldownturndidhaveanimpactonprofitability,butitseffectsweremutedcomparedtomanyotherindustries.Thisisbecauseproductsinmanysegmentsofthepharmaceuticalmarketareconsiderednecessities,andhencearesomewhatrecession-proof.
• The end of patent protection for some blockbuster drugs is leading to more partnerships between generics manufacturers and big brand pharmaceutical firms.Thisyear(2012)marksthesteepestpointofthesocalledpatentcliff,whenmanyblockbusterdrugscomeoffpatent,andmanyglobalpharmaceuticalfirmsarelookingtoAsiatocounterfallingrevenuestreams.Theyaremovingheadcountfromdevelopedtoemergingmarkets,includingAsia,andmakingstrategicacquisitionsofgenericsmanufacturersinordertodiversifytheirbusiness.
© The Economist Intelligence Unit Limited 2012 5
Asia Competition Barometer:Pharmaceuticals
Asia’s growing importance for corporate performance and global competitiveness
Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.1
By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.ThereareseveralbroadtrendsthathavebeendrivingAsia’spharmaceuticalsector.Thefirsttrendis
demographicchangethatisboostingmarketdemand.ManyAsiancountrieshavebeenexperiencingrapidpopulationgrowth.India’spopulation,forexample,grewfrom1.02bnin2001to1.18bnin2010.TheEIUexpectsittoreach1.29bnby2016(seeFigure1).
Populationgrowthhasbeentheresultofnotonlyhighbirthratesinsomecountries,butincreasedlifeexpectancyinmostcountries(seeFigure2).Onarelatednote,thoseAsiancountrieswithlowbirthrates,suchasChina,JapanandSingapore,arenowfacingageingpopulations,whichpresentsgrowthopportunitiesforpharmaceuticalcompaniesmakingspecialiseddrugsfordiseasescommonamongtheelderly.
1AsiahereincludesBangladesh,China,HongKong,Indonesia,India,Japan,SouthKorea,Malaysia,Myanmar,Philippines,Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam
Figure 1: Population(m)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000JapanIndonesiaIndiaChinaAsia
2016201520142013201220112010200920082007200620052004200320022001
Source: BPS; China National Bureau of Statistics; EIU; US Bureau of Census
© The Economist Intelligence Unit Limited 20126
Asia Competition Barometer:Pharmaceuticals
Theseinter-relateddemographicfactors—higherlifeexpectancies,populationgrowth,andtheoverallageingofsomepopulations—havetogetherboosteddemandforavarietyofpharmaceuticalproducts.
Thesecondtrendisrisingincomes,whicharedrivingdemandforbetterdrugsandmedications.IncomeshaverisendramaticallyacrossAsiaoverthepasttenyears,inlinewithoveralleconomicgrowth,boostingover–the-counterdrugpurchases.Moreover,abouthalfofAsia’spopulationstilllivesinruralareas,buttheytoonowhavegreateraccesstomainstreammedicinesbecauseofwidespreadpublicandprivatesectoreffortstobroadenaccesstohealthcare.IncreasingaffluenceandeducationalstandardsinAsiaarealsoraisinggeneralhealthawarenessamongconsumers,furtherboostingdrugsales.
Thethirdtrend,whichisdriveninpartbythesecond,islifestylechange.AsAsianshavebecomericher,theirdietsandhabitshaveevolved.Forexampletheynoweatmoremeatanddrinkmoresweetenedbeverages.Thishasbeenaccompaniedbyanincreaseintheincidenceofso-calleddeveloped-worlddiseases,includingcancer,diabetesandheartailments.Forexample,ChinaandIndianowhavetheworld’slargestdiabeticpopulations,withsome51mand43mpeoplerespectively.2ExpertsbelievethattheprevalenceofdiabetesinAsiawillriserapidlybetweennowand2030(seeFigure3).
Meanwhile,governmentsintheregionhavebeeninvestinginhealthcareinfrastructureandservicesinordertoalleviatetheburdenonhouseholdsandtocopewithchangingdiseaseprofiles.AuthoritiesincountriessuchasChina,IndiaandIndonesiahavebeentryingtobroadenbasichealthcoveragethroughnationalinsuranceschemes.Thiscombinationofpublicandprivatespendinghasledtoasteadyrisein
Figure 2: Life expectancy(years)
0
20
40
60
80
100
VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina
2001 2016
Source: US Bureau of Census; Economist Intelligence Unit
2Shawetal,“Globalestimatesoftheprevalenceofdiabetesfor2010and2030”,Diabetes Research and Clinical Practice,Vol87,Issue1,Jan2010,pages4-14
Figure 3: Diabetes prevalence(%)
0
3
6
9
12
15
Vietnam 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
Asia Competition Barometer:Pharmaceuticals
percapitahealthcarespendingintheregion(seeFigure4).Thisrisinghealthcarespendinghasbenefitedthepharmaceuticalsector.AccordingtotheEIU,the
pharmaceuticalmarkethasgrownrapidlyinAsia,withsaleshavingmorethandoubledfromUS$97bnin2001toUS$214.2bnin2010.By2016,theEIUexpectsittohitUS$386bn,reflectinganannualaveragegrowthrateofmorethan13%.
Figure 4: Healthcare spending(per head, US$)
0
500
1,000
1,500
2,000
2,500
3,000
VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina
2010 2030
Note: Total public and private expenditure on health, per capita.
Source: Epsicom; WHO; EIU
Asiahasbecomeincreasinglyimportantasamarketforlargeglobalpharmaceuticalcompanies.Forexample,in2010Asiaaccountedfor21%ofglobalrevenuesatBayer,aGermanchemicalandpharmaceuticalcompany,upfromjust10%in1990.3
Between2004and2011,fDiMarkets,adataprovider,recorded653cross-borderinvestmentprojectsinAsiafrom321companiesinthepharmaceuticalandbiotechnologyspace,worthatotalofUS$28.6bn.Some70%ofthesewereinthepharmaceuticalsectorandtherestinbiotechnology.Chinawasthelargestrecipientwith186inwardinvestmentsandwascloselyfollowedbyIndiaandSingaporewith157and94investmentsrespectively.
GlobalpharmaceuticalfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestotheregion.TheregionisalsoincreasinglyseenasakeyR&Dhub,givenitslowcostsandhugetalentpools.Ofthe653cross-borderpharmaceuticalsandbiotechnologyinvestmentsthatfDiMarketsrecordedinAsiafrom2004-2011,R&Daccountedfor200projects(31%),comparedtomanufacturingwith175(27%)andmarketingandsupportwith168(26%).
BritishfirmGlaxoSmithKline(GSK),SwisscompanyNovartis,andGermany’sBayerledtheinvestmentchartsoverthisperiodwith21,16and13projectsrespectively.Theseprojectsvaryinscope.Forinstance,NovartishasinvestedheavilyinbiotechnologyanddrugdiscoveryunitsinplacessuchasShanghaiandSingapore.Amongotherthings,BayerhasbeeninvestinginR&Dfordiseases,suchaslivercancer,thathaveahigherincidenceinAsia.OneofGSK’srecentinvestmentsisinanewcallcentreinOkinawa,Japan,wherepharmacistswillrespondtorequestsfrommedicalprofessionalsaswellasconsumers.
3Bayercorporatewebsite
© The Economist Intelligence Unit Limited 20128
Asia Competition Barometer:Pharmaceuticals
“AsiaPacificisnowseenasthekeygrowthopportunityintheshorttomediumterm,andhencecompaniesareincreasinginvestmentlevelstocapturethatgrowth,”saysMarkMallon,regionalvicepresidentAsiaPacificandpresidentChinaatAstraZeneca,aBritishbiopharmaceuticalfirm.
© The Economist Intelligence Unit Limited 2012 9
Asia Competition Barometer:Pharmaceuticals
Competition and profitability at Asian firms
Thenumberandsizeofpublicly-listedfirmsinthepharmaceuticalsectorinAsiahasincreaseddramatically.Thenumberoflistedcompaniesincreased34%between2004and2009,from276firms
to370.Overthesameperiod,thetotalcombinedrevenueofpublicly-listedpharmaceuticalcompaniesalmosttripledfromUS$27.4bntomorethanUS$73bn.
Competition: Marginal decrease in an extremely fragmented sectorAsia’spharmaceuticalsectorisextremelyfragmented,withthepresenceofnumeroussmallermanufacturers.JustinIndia,forexample,therearemorethan10,000pharmaceuticalcompanies,mostofwhicharesmall.
TocapturetheintensityofcompetitioninthepharmaceuticalsectorinAsia,wehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHIvaluescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sT&Lindustryincreasedfrom1.54in2004to1.99in2009(seeFigure5),signifyingthatthe50biggestfirmsintheBarometerincreasedtheirmarketconcentrationmarginallyoverthatperiod.4
Inotherwords,althoughmanynewplayershaveenteredthemarket,thebiggestfirmshavemanagedtomarginallyincreasetheirmarketshare.Thatsaid,thebiggestpharmaceuticalfirmsdominatelessthandothebiggestfirmsinsomeotherindustries.Forinstance,theHHIreadingforthepharmaceuticalsectorin2009(1.99)ismuchlowerthanthatoftheinformationtechnologyservicessector(5.73)andtheprecisionengineeringsector(9.30).
Thethreelargestpharmaceuticalcompaniesbyturnoverin2009—SinopharmGroup,ShanghaiPharmaceuticalsandNanjingPharmaceutical—enjoyedacombinedrevenueshareofjust18.5%in2009,upfrom14.8%in2004(seeFigure6).
4Ameasureofthesizeofcompanies in relation to the industry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof350listedcompaniesassessed.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.
© The Economist Intelligence Unit Limited 201210
Asia Competition Barometer:Pharmaceuticals
Figure 5: Herfindahl–Hirschman Index
1.00
1.25
1.50
1.75
2.00
200920082007200620052004
Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Herfindahl—Hirschman Index (HHI) 1.54 1.37 1.75 1.75 1.76 1.99
Thebiggestfirmshavebeenabletogrowtheirmarketsharethroughfiercepricecompetitionandindustryconsolidation.Manyofthenewplayerswereundoubtedlyunabletocompetewiththescaleefficienciesandlowerdistributioncostsofthelarger,establishedplayers.Meanwhile,China’sgovernmenthasbeenleadingadrivetopushconsolidationinthehighlyfragmentedsector,andhencelargefirmssuchasSinopharmandShanghaiPharmaceuticalsareexpectedtocontinuetheiracquisitionspreesin2012-2016.
AnotherreasonfortheincreasedmarketshareofthelargestAsianfirms,accordingtoAchinGupta,seniorvicepresidentofcorporatestrategyatGlenmarkPharmaceuticals,anIndianfirm,isthatwithrisingincomesmoreAsianscannowaffordsomeoftheexpensivetreatmentsthatthebigfirmslicense,suchasthosefordiabetes.InMrGupta’sview,thistrendhashadafargreaterimpactthantheglobalfinancialcrisisonthesmallerfirms’marketshare.
Competitionislikelytoremainintense,particularlyasglobalpharmaceuticalmajorswillbelookingtocushiontheirlossofpatenteddrugrevenuesthroughstrategicacquisitionsofgenericsmanufacturersin
Figure 6: Top ten companies by turnover
Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)
SinopharmGroup China 2.17 7.14
ShanghaiPharmaceuticals China 1.64 4.71
NanjingPharmaceutical China 0.8 2.13
RanbaxyLaboratories India 1.22 1.7
ShenzhenAccordPharmaceutical China 0.24 1.66
HarbinPharmaceuticalGroup China 1.08 1.6
DrReddy’sLaboratories India 0.42 1.59
Cipla India 0.55 1.27
Max India India 3.31 1.27
HuadongMedicine China 0.44 1.18
Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam
© The Economist Intelligence Unit Limited 2012 11
Asia Competition Barometer:Pharmaceuticals
theregion.TheywillbechallengedbyseveralAsianpharmaceuticalmanufacturerswhoarefightingforabiggershareofthegenericsmarket.
Meanwhile,smallerAsianpharmaceuticalfirmswillcompetetoprovidespecificservices,suchascontractmanufacturingorresearchworkforlargercompanies.Forinstance,Bristol-MyersSquibb,anAmericanpharmaceuticalfirm,andWuXiPharmaTech,aShanghai-basedcontractresearchorganisation(CRO)specialisinginpharmaceutical,biotechnologyandmedicaldeviceR&D,announcedinMarch2011thattheyhaveenteredastrategicpartnershipthroughwhichWuXiwillconductstabilitystudiesonnewchemicalentities.Thisisanextensionofalong-standingalliancebetweenthetwofirms,oneofmanybetweenCROsandbigpharmaceuticalfirmstohaveemergedoverthepastfewyears.
Similarly,Asiancontractmanufacturingorganisations(CMOs)willalsoseektosecuremoreworkfrombigpharmaceuticalfirms.Todoso,theywillhavetocompetewithregionalandWesternCMOs.“TheabilitytoprovidestrictadherenceandtopqualitywillbethekeytoseparatethetopCMOsfromtheaverageCMOs,”saysMichaelBrown,vicepresidentofoperationsatLonzaBiologicsinSingapore.HesaysoneofthecurrentcompetitiveadvantagesforWesternCMOsisthatsomecustomersarestillconcernedaboutstandardsatAsianfirms.ThemainperceivedadvantagesofWesternCMOsare“consistentquality,reliability,IPprotectionandexperience,particularlyinthebiologicsdevelopment,”headds.
Profitability: Small increaseTomeasuretheprofitabilityofthepharmaceuticalsector,wedevelopedacompositeindexoffiveratioswhichmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AccordingtoourBarometer,withtheexceptionofgrossmargin,allotherprofitmarginshaverisenrelativeto2004(seeFigure7).
Figure 7: Profitability Index
90
105
120
135
150
200920082007200620052004
Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Profitability index 102.5 100.0 103.8 110.8 102.6 109.3
EBITDAmargin(%) 13.1 12.6 13.3 14.2 13.4 13.7
Grossmargin(%) 40.3 39.2 37.7 38.5 37.9 38.4
Returnoncapitalemployed(%) 11.1 10.9 14.2 17.1 12.7 16.4
Returnonequity(%) 8.3 8.8 13.9 17.4 12.4 16.9
Returnonassets(%) 3.6 3.7 6.0 7.8 5.6 8.1
© The Economist Intelligence Unit Limited 201212
Asia Competition Barometer:Pharmaceuticals
TheProfitabilityIndexforAsia’spharmaceuticalindustryincreasedfrom102.5in2004to109.3in2009.5ProfitabilityinAsia’spharmaceuticalsector,whichwasatitshighestin2007,sawanoticeabledipin2008,beforebouncingbackin2009.
The2008globaldownturndidhaveanimpactonprofitabilityintheregionalpharmaceuticalsector,butitseffectsweremutedcomparedtomanyotherindustries.Thisisbecauseproductsinmanysegmentsofthepharmaceuticalmarketareconsiderednecessities,andhencearesomewhatrecession-proof.AccordingtoIMShealth,anindustryresearchfirm,pharmaceuticalconsumptioncontinuedtogrowthroughtherecessionandgloballyonlyEstoniaandLatviasawanoveralldeclineinpharmaceuticalconsumptionbyvolume.6
Despiteoperatingrevenuesalmosttriplingfrom2004to2009,profitabilityhasnotincreaseddramaticallyduepartlytoincreasesinmaterialcostsandoverallwages.Forinstance,theaveragecostofemployeesincreasedfromUS$6,000toUS$9,000between2004and2009.Overthatsameperiod,theindustry’stotalemployeecostsincreasedfromUS$1.1bntoUS$3.5bn.
Overthenextfewyears,MrMallonbelievesthatpharmaceuticalfirmswillhavetoreducetheircostbase,whileaddressingever-changingcustomerdemands—duetorisingincomesandchangingdiseaseprofiles—andimprovingaccesstomedicinesinordertoboostprofitability.Whilerecognisingtheneedtocutcosts,MrGuptaisalsobullishabouttheregion’sgrowthprospects.HesaysbothAsianaswellasnon-Asianpharmaceuticalcompaniesaregoingtoberelyingonthe“increaseinaffordabilityofdrugsduetoGDPgrowth,betterhealthcaresystemsandmoreextensivehealthcareinfrastructure”forprofitabilitygrowthinAsia.Manycompaniesaretryingtocaptureabiggerportionofthisgrowingpiebyincreasingtheirproductofferingsandexpandingtoruralareas.
6“Theimpactoftheeconomicdownturnonglobalaccesstomedicines”,IMSHealthfortheWorldHealthOrganisation,Jan2009
5ThecompositeProfitabilityIndexismadeupoffiveratios that each represents a different aspect of a company’sprofitability.Formore information on the Barometermethodology,please refer to the last section inthisreport.
© The Economist Intelligence Unit Limited 2012 13
Asia Competition Barometer:Pharmaceuticals
Case study: Glenmark Pharmaceuticals
Glenmark Pharmaceuticals: The benefits of longstanding presenceGlenmarkPharmaceuticals,anIndianpharmaceuticalcompany
withoperationsinspecialty,genericsandout-licensing,hasseensalesincreasefromRs6.04bn(US$138mat2005exchangerates)in2004/05toRs29.5bnin2010/11(US$645.2mat2010exchangerates),oratacompoundannualgrowthrateofnearly31%.IndiaandSouth-eastAsiatogethercontributearound25-30%ofitsoverallprofits,andabout50%ofitsbrandedbusinessincome.
AchinGupta,thefirm’sseniorvicepresidentofcorporatestrategy,saysalthoughIndiaisakeymarket,thecompanyisgrowingevenfasterinsomeotheremergingmarketssuchasBrazil,Mexico,theCIS,RussiaandEasternEurope.“Ourbrandedgenericsbusinessisgrowingatabout40%outsideofAsia,”hesays.
CompetitioninAsiahasincreasedoverthepastfiveyears,MrGuptasays,largelyduetotwofactors.Firstistheincreasedinterestfrommultinationalsintheworld’semergingmarkets.SecondisthegrowthofIndianfirms.“Wewentfromhavingasalesforceofabout1,200-
1,500in2005/06toasalesforcethatisabout3,000-strongtoday,”MrGuptasays.“Moreover,theabilityofIndiancompaniestoplayintheglobalgenericsmarkethasgiventhemadditionalfundsthatarebeinginvestedinIndia.”
MrGuptasaysthatbrandequityhasbeenabigdriverofprofitabilityinAsia.“Leadingbrandswouldtypicallycommandaslightpremiumoverlesserknownproductsandtheywouldstillsellasaresultofconfidenceplacedinthembydoctors,”hesays.“Theperspectivewasthattheseproductswereofhigherquality.”Hebelievesthistrendwillcontinueforatleastthenextfiveyears.OtherfactorssuchasGDPgrowth,widerinsurancecoverageandbetterhealthcareinfrastructurewillallincreasedrugpenetration.Theywillalsoopenupopportunitiesforelectivetreatmentsandothermoreexpensivetreatments.
However,onefactorMrGuptathinkscoulddampenprofitabilityisthe“threatofreferencepricingcominginIndiawherethetopthreebrandsintheindustrywillbeusedasareferencepricefortherestofthecompanies.”Additionally,heworriesaboutpricecontrolsthatarealreadyprevalentinafewcountrieswheregovernmentbuysmostofthedrugs.“Theyissuetendersandtheseareveryprice-competitive,”hesays,pushingdownprofitability.
© The Economist Intelligence Unit Limited 201214
Asia Competition Barometer:Pharmaceuticals
7“India’spharmaceuticalindustryoncourseforglobalization”,DeutscheBankResearch,Apr9th2008
Figure 8: Pharmaceutical sales(US$ bn)
0
50
100
150
200
VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina
2010 2016
Source: EIU; Epsicom
Positioning for success in Asia
Sustained growth
Overthenextfewyears,globalpharmaceuticalfirmswillbeincreasingtheirpresenceintheregioninordertotapthegrowingmarket,lowertheirproductioncosts,andimprovetheefficiencyof
theirR&Dprocesses.MrGuptaatGlenmarkPharmaceuticalssaysthatmostfirmsareexpectinggrowthof15%perannumintheAsianmarketsoverthenextfivetotenyears.Thepharmaceuticalmarketsoftheeightcountriescoveredinthisstudyaresettoexpandrapidlyoverthenextfewyears,ledbyChina(seeFigure8).
Severalfactorswillcontinuetodrivegrowthintheregion’spharmaceuticalsector.Firstistheregion’sseculargrowthstory.SecondisAsia’scontinuedattractivenessasamanufacturingdestination.WagesintheIndianpharmaceuticalsector,forinstance,arejust30%ofEuropeansalariesor20%ofthoseintheUS.7Amongotherthings,AsiahasbecomeanimportantdestinationforthedevelopmentofvaccinesfordiseasessuchasHepatitisAandB,andseasonalinfluenza.
Third,morefirmsareinvestinginR&DinAsia.ThecostofclinicaltrialsinIndia,forinstance,isabout
© The Economist Intelligence Unit Limited 2012 15
Asia Competition Barometer:Pharmaceuticals
halfofwhatitisintheUS,andtotalR&Dsavingscanbeofasimilarmagnitude.8Asiahasalargetalentpool,offeringitahugehumancapitaladvantageoverotherregions.ThenumberofdoctoratesawardedinthenaturalsciencesandinengineeringhaseitherleveledofforfallenincountriessuchastheUS,theUKandGermanysincethelate1990s,saysPWC,aconsultancy,whilstithasbeenincreasingsteadilyinAsia,suggestingthatAsia’stalentandknowledgebaseisincreasing.9
GlobalpharmaceuticalfirmshavethereforebeeninvestinginAsia.Forexample,Sanofi,aFrenchpharmaceuticalfirm,saidinOctober2011thatitwillsetupamanufacturingplantinHyderabad,India.ThecompanywillinvestRs5bn(US$102.9m)inthefacility,whichwillproducevaccinesforthelocalmarketandmaybegintheproductionofotherproductsfordiabetestreatment,animalhealthandconsumerhealthcare.In2009,thecompanyacquiredHyderabad-basedShanthaBiotechnicsinadealvaluingthecompanyat€550m(US$764.5m).ItsVietnamesesubsidiaryalsoplanstobuildathirdpharmaceuticalplantinHoChiMinh,Vietnam.Similarly,AstraZenecaisinvestingUS$230minanewmanufacturingplantinChinaMedicalCityinChina’sJiangsuprovince.Thenewsiterepresentsitslargesteverinvestmentinasinglemanufacturingfacilityglobally.10
ThistrendofinwardinvestmentsinthepharmaceuticalsectorwillcontinueinthenextfewyearsasthebigglobalcompanieslooktoprofitfromAsia’suniquepositionasahubforthemanufactureofgenericdrugs,adestinationforcheaperproductioncostsandafast-growingpharmaceuticalmarket.
WhiletheopportunitiesinAsia’spharmaceuticalindustryarelarge,soaretherisks.GovernmentsaroundAsiaarestillintheprocessofdetermininghowbesttodesignandfinancetheirhealthcaresystems.Somedecisionswillhaveaprofoundimpact.Forexample,MrGuptabelievesthatregulatoryshiftssurroundingtheuseofauthorisedgenerics(referredtobysomeasbrandedgenerics)willgreatlyinfluencetheindustry.TherehasbeensomepushbackinEuropeandtheUSagainsttheuseofauthorisedgenerics.AiswariyaChidambaram,ananalystatFrost&Sullivan,aresearchhouse,concludesinanarticlethat“prohibitingthelaunchofauthorisedgenericsduringthe180daysexclusivityperiodwillnotonlyhelpindependentgenericfirmsgaincommendableprofitbutwillalsofacilitateeasieraccesstoaffordablemedicineforconsumers.”11
MrGuptasaysthatpressuresmayforcesomeAsianmarketstoimplementasimilarbanonauthorisedgenerics.Thiswouldhurtbigpharmaceuticalfirmsbutbenefitgenericsmanufacturers.Onarelatednote,MrMallonwarnsthathealthcareanddrugpayorsareunderpressuretoincreaseadoptionofcheapergenericalternativesinordertoreduceoverallhealthcarecosts.GlobalfirmswillneedtocarefullymonitorregulatorydevelopmentsaroundAsiaastheyplantheirmarketstrategies.
Patent expirations will lead to more partnerships involving Asian generics manufacturersBigglobalpharmaceuticalproducersfaceseriouschallengesoverthenextfewyears,asmanyoftheirblockbusterdrugshaveeithergoneoff-patentorsoonwill,hurtingtheirprofitability.AnumberofpopulardrugswilllosetheirpatentprotectionintheUSthisyear,leavingtheirproducersexposedtocompetitionfromgenericsmanufacturersandslashingtheirrevenuesbyupto40%.12GlobalratingsagencyFitchestimatesbrandeddrugswithsalesofUS$21bnwentoff-patentin2011,andanotherUS$52bnworthofbrandeddrugsaresettolosetheirpatentsin2012alone.13Theexpiryofpatentscould
8“India’sEmergenceasaGlobalR&DCenter”,SwedishInstituteforGrowthPolicyStudies,Dec2007
9“Pharma2020:Thevision–Whichpathwillyoutake?”,PricewaterhouseCoopers,Jun2007
10“Ground-breakingofAstraZeneca’sManufacturingFacilityinChinaMedicalCity”,AstraZeneca,Jan6th2012
11“AuthorisedGenerics:BoonorBane?”,Frost&Sullivan,Aug12th2011
12“Industriesin2012”,EconomistIntelligenceUnit,Dec21st2011
13“Indianpharma’soutlookstablefor2012,saysFitch”,Pharma Times,Feb2nd2012
© The Economist Intelligence Unit Limited 201216
Asia Competition Barometer:Pharmaceuticals
beahugedriverforthesalesofAsiangenericmanufacturerswhostandtobenefitmostfromtheso-calledpatentcliff.Inresponsetotheimpendingdropinrevenues,bigpharmaceuticalcompaniesarerethinkingtheircorporatestrategiesandredeployingtheirresources,generallytowardsR&Dandemergingmarkets.
Inthefourthquarterof2011,Pfizer,anAmericanfirmandtheworld’slargestdrugmanufacturer,sawa24%fallinitssalesofLipitor,largelyduetoa42%declineintheUS.ThiswasduetocompetitionfromgenericversionsofthecholesteroldrugandthelossofpatentprotectionforthedrugintheUSinNovember2011.PfizersaidlastyearitwouldattempttoslashitscoststhroughlayoffsofthousandsofresearchersinordertocompensateforthedecliningsalesofLipitor,oncetheworld’stopsellingdrug.14
Similarly,AstraZenecaannouncedinFebruary2012thatitwouldlayoff7,300employeesor12%ofitsworkforceoverthenexttwoyears,asmanyofthecompany’stop-sellingdrugpatentsareexpiringoverthenextfiveyears.Reflectingitsshiftingpriorities,thefirmhasalsohired“thousandsofnewemployeesforitsexpansionintoemergingmarketsandforresearchingandproducingbiotechdrugs”.15
CompaniesthatstandtobenefitmostfromthesepatentexpirationsaregenericsdrugmanufacturerssuchasIndia’sRanbaxyandDrReddy’sLaboratories.Thegenericsmarket’sgrowthprospectsaregoodalsobecausegovernmentsinmanycountrieswithpubliclyfundedhealthcareplansarelookingtocurboveralldrugspending.
AccordingtoDatamonitor,adataprovider,theAsiaPacificgenericsmarketexpandedatacompoundannualgrowthrateof13.5%between2006and2010toreachUS$44.8bninrevenues.Itexpectsthemarkettogrowby12%in2010-2015toreachUS$79bnby2015.
Inanticipationofthisshiftingcompetitivelandscape,bigglobalpharmaceuticalfirmshavetriedtogetafootholdinthisgenericsindustrythroughstrategicacquisitions.Forinstance,in2008Japan’sDaiichi-SankyoacquiredacontrollingstakeingenericsmanufacturerRanbaxyLaboratoriesforUS$4.6bn.Twoyearslater,US-basedAbbottLaboratoriesacquiredthegenericsbusinessofPiramalHealthcareforUS$3.7bn.TheserepresenttwoofthelargestacquisitionsacrossallsectorsinIndia.Meanwhile,Israel’sTevaPharmaceuticalIndustriesisalsolookingatacquisitionsinAsia,aregionwhereitexpectsgenericssalestoboom.16
MrGuptaatGlenmarkPharmaceuticalssaysweareseeingglobalplayerssteppingintotheauthorisedgenericsarena.“ThereisincreasingacceptanceonthepartofMNCstocustomisetheirofferingstomarketslikeIndiaandotherleadingmarketsintheregionsuchasMalaysiaandthePhilippines,”hesays,addingthatthistrendisgoingtocontinue.
Thegenericsmanufacturersalsostandtobenefitfromsuchstrategicacquisitionsorpartnerships.Forinstance,AsiangenericsmanufacturershaveoftenhadatoughtimesellingtheirproductsinWesternmarkets.Theyarefacedwithavarietyofobstaclessuchaslegalchallengesfrompatentowners,difficultiesinmeetinginternationalregulatoryandqualitystandardsandfiercecompetition.Partnershipswithglobalpharmaceuticalcompaniescanhelpthemovercomethesechallenges.Inaddition,throughpartnershipswithbigpharmaceuticalfirmswithcutting-edgetechnologies,genericsmanufacturerscanmoveupthevaluechainandbecomemoreinnovative.
However,suchpartnershipsandacquisitionsdohavetheirpitfalls.Forinstance,criticssuggestthatDaiichi-SankyodidnotconductthoroughduediligenceonRanbaxy,andinitsquesttobuyamaturecompanywithasignificantpresenceinthegenericssegment,thecompanymayhaveoverpaid.17
14“Pfizertrims2012view,citingstrongerdollar”,Reuters,Jan31st2012
15“AstraZenecaplanstocut7,300jobs”,The Wall Street Journal,Feb3rd2012
16“TevaeyesmoreacquisitionsinAsia”,Pharma Times,Jan12th2012
17“DaiichiYettoGainfromRanbaxyBuy”,The Wall Street Journal,Mar16th2011
© The Economist Intelligence Unit Limited 2012 17
Asia Competition Barometer:Pharmaceuticals
Case study: AstraZeneca
AstraZeneca: Emphasis on innovationAstraZeneca,aglobalbiopharmaceuticalcompany,sawAsiaPacific
salesrisemorethan7%in2011toreachUS$6bn.MarkMallon,thefirm’sregionalvicepresidentofAsiaPacificandpresidentofChina,saysAsiais“afundamentallyattractive,highgrowthregion”forthepharmaceuticalindustry.Overthenextfewyears,heexpectsthesectortoexperiencestrongdouble-digitgrowthinemergingmarketssuchasChina,VietnamandIndia,andlowsingle-digitgrowthinthemorematuremarketssuchasAustralia,JapanandTaiwan.
AccordingtoMrMallon,competitioninthepharmaceuticalsectorinAsiahasintensifiedasmajorpharmaceuticalcompaniesstepuptheirinvestmentsintheregionacrosssalesandmarketing,R&D,andmanufacturing.Heexpectsthistrendtocontinue.“Competitionfromgenericfirmshasalsoincreased,bothinestablishedandemergingmarkets,”hesays.Inhisview,competitionfromAsianpharmaceuticalfirmstendstobemoreintenseinmarketsandsegmentswithahighgenericspenetration.
MrMallonemphasisesthatprofitabilityintheindustryhasbeendrivenbyinnovation—bothintermsofnewproductsandnewcommercialmodels—andagrowingfocusoncosts.Headdsthat“Asia’sstronghistoryofinnovationpresentsanenvironmentwherecreativitycanflourish”.AstraZeneca,hesays,isinnovatingacrossabroadrange
ofitsactivitiesintheregion,“fromthewaywepartnerwithotherorganisationstothewaywefundnewresearchanddeliverhealthcareservices”.
Onarelatednote,MrMallonalsobelievesitisimportantfortheindustrytoaddressthegrowingneedsofpayorsandtoimproveaccesstomedicines.Thereis“anunder-servedpopulationofpeoplewhocanonlyaccesslimitedhealthcareinfrastructuresandhavealimitedabilitytopayformedicines,”hesays.
Forexample,inChinamostofthecompany’sbusinesscurrentlycomes from hospitals in 200 of the largest cities of more than 1m people.Nearly900mpeopleliveoutsidethesecitiesandtheChinesegovernmentisprovidingmajorinvestmenttoimprovehealthcareinthesecommunities.“Wewanttobepartofthisbroadermarketandbuildasustainablebusinessinservingthosepeople,”hesays.
Inordertodoso,thecompanyisworkingwiththeChinaHealthPromotionFoundationandtheMinistryofHealthtoimprovecommunityhealthcarebystrengtheningthetrainingofitsgeneralpractitioners.Itisalsosponsoringathree-yearprogrammethatwilltrain30,000doctorssotheycanbettertreatsomecommonchronicdiseases.
Reachingouttounderservedsegmentsofthepopulationisperhapsnotonlyamoralimperativeforsomepharmaceuticalfirms,butcanalsoprovestrategicallyastute,astheyseektoimprovetieswithgovernmentsandregulatorsintheregion,andgrowtheoverallmarket.
Withinamonthoftheacquisition,theUSFoodandDrugAdministrationbannedtheimportof30ofRanbaxy’sgenericdrugsformanufacturingviolationsandalsoaccusedRanbaxyofsellingmisbrandedpharmaceuticals.ThecompanyhassubsequentlyexperienceddelaysingettingregulatoryapprovaltosellotherdrugsintheUS.TheUSJusticeDepartmenthassincefiledaproposedsettlementwithRanbaxy,andthecompanyhassetasideUS$500mforliabilitiesconnectedtotheinquiry.Allthispointstothefactthattherearerisksinvolvedwithmergersandacquisitionsinanindustrywithvaryingnationalregulations,andqualityandsafetystandards.
© The Economist Intelligence Unit Limited 201218
Asia Competition Barometer:Pharmaceuticals
Case study: Lonza
Lonza: Focus on qualityLonza,aSwisschemicalsandbiotechnologyfirmwhoseproducts
feedintothepharmaceutical,healthcareandlifesciencesindustries,builtitsfirstAsianplantinChina15yearsago.Sincethen,thefirm’sproductionandR&Dnetworkintheregionhasgrownconsistently,saysMichaelBrown,vicepresidentofoperationsatLonzaBiologicsinSingapore.Overthelasttenyears,LonzahasinvestedaboutCHF1bn(US$1.1bn)inAsia.Some1,400ofits11,000-strongglobalworkforcearebasedintheregiontoday.Asiacontributes14%ofLonza’soverallrevenuesandthisisexpectedtoriseto20%by2015.
Foritschemicalmanufacturingbusiness,Asiarepresents“asignificantplatformofgrowthforitsexistingandnichetechnologies,”MrBrownsays.Butintermsofthemarketfornewbiologics,asidefromJapan—oneofthesevenbiggestmarketsworldwide—demandinAsiaisrelativelysmall.“However,domesticAsianmarkets,especiallyChina,arefuturegrowthopportunitiesfornewmedicalentities(NMEs),andalsobiosimilarsandgenerics,”headds.
MrBrownsaysthatcompetitioninAsiahasincreasedinthesmallmoleculessegmentofthecustommanufacturingbusiness.“However,thenumberofnewcompetitorsissomewhatlimitedconsideringthattheproductswemanufactureareallheavilyregulatedandrequirecomplexmanufacturingtechnologies,”hesays.“Inareaslikepeptides,
conjugatedantibodies,cytotoxicswedonotseemuchcompetitionoutofAsia.”Similarly,thefirmhasfewcompetitorsinthebiologicalcustommanufacturingspace,whereMrBrownbelievestheAsiancompetitionis“stillonalearningcurve”.However,LonzadoesexpectincreasedcompetitionfromAsiancompetitorsinthelifescienceingredientsbusiness,whichsupportsnutraceuticals.
Meanwhile,MrBrownbelievesthatrisingincomesintheregionareslowlyerodingthelabourcostadvantagesthatsomeAsiancompetitorscurrentlyenjoy.Additionally,Asiangovernmentsarealsoraisingtheirenvironmentalprotectionandqualitystandards.This“increasingrigidnesscomingfromregulatoryauthoritieswillforceAsiancompetitorstoobeystrictrules,”hesays,henceraisingtheircostofcompliance.HeexpectsAsiancompetitorstoinvestheavilytoupgradetheirfacilities,furtherreducinganypriceadvantagestheyenjoy.
Overthenextfiveyears,LonzaaimstogrowitsbiologicaldevelopmentservicesinAsiabycementingitsrelationshipswithtraditionalpharmaceuticalcompaniesandnewlocalcompaniesthatarecurrentlyexpandinginAsia.MrBrownbelievesthatthereareanincreasingnumberoffirmsdevelopingaclinicalfootprintacrosstheregion,andLonzaaimstosupporttheirpipelineswithitsproductsandservices.
© The Economist Intelligence Unit Limited 2012 19
Asia Competition Barometer:Pharmaceuticals
Outlook
ContinuedeconomicgrowthinAsiahasledtoincreasedhouseholdincomesandspendingonhealthcareandpharmaceuticals.“InAsia,clearlywe[intheindustry]arebenefittingfromthe
growingnumberofpeopleinitwhohavebetteraccesstohealthcareandarewillingandabletopayformedicines,”MrMallonatAstraZenecasays.Additionally,thedrivebygovernmentsintheregiontobroadenaccesswillalsoboostdemandforAsia’spharmaceuticalmarket.
RisingincomesandurbanisationinAsiahavealsoledtolifestylechangesthathaveraisedtheincidenceofdeveloped-worlddiseasesintheregion.Togetherwithlongerlifeexpectanciesandotherdemographicchanges,thesetrendsarerapidlybroadeningthehealthcareneedsoftheregion,drivingdemandforarangeofpharmaceuticalproducts.
Separately,asinmanyotherindustries,AsiahasalsograduallybecomeakeysourceofproductionandR&Dforthepharmaceuticalsector.Thistrendislikelytocontinue,owingprimarilytolowerproductioncostsandincreasinglysophisticatedR&Dcapabilities,bothunderpinnedbythehugetalentpoolsaroundtheregion.
Overthenextfewyears,theregion’sindustryislikelytobeshapedbytwoseparatebutrelatedcompetitivetrends.Firstisthecompetitionbetweengenericsmanufacturersandinnovativebigbrandfirms,particularlyasmanyblockbusterdrugpatentsexpire.Wearelikelytoseemanymoremergers,acquisitionsandotherpartnershipsbetweengenericsmanufacturersandbigbrandcompanies,astheyseektoexploitcomplementaryadvantages.Althoughthejuryisstilloutonthevaluethatmaybecreated—theDaiichi-SankyoandRanbaxydealprovidingsomecautionarylessons—thereisagoodchancethatthesector’sglobalchampionsofthefuturemaybetheproductsofpartnershipsinvolvingAsianfirms.
SecondisthetensionbetweensmallandlargeAsianfirms.Thesectorhaswitnessedsomeconsolidationinrecentyears,andthereisdoubtabouttheextenttowhichsmallfirmscancompetewithlargerfirmsthatenjoyscaleefficienciesandlowerdistributioncosts.Nevertheless,thereare
© The Economist Intelligence Unit Limited 201220
Asia Competition Barometer:Pharmaceuticals
certainnichesthatsmallfirmscancontinuetoexploit.Theymaynothavetheresourcestoinvestindrugdiscoveryanddevelopmentbutmanyofthemhaveenjoyedsuccessaslow-costgenericproducers.Overthelasttwodecades,hundredsofnewpharmaceuticalcompaniesbeganoperationsinordertothemeettheboomingdemandforgenericdrugs,specialtydrugsandbiotech-basedproducts.
Furthermore,withincreasedcostpressuresinWesternmarkets,AsiahasbecomeanimportanthubforCMOsandCROs.AsianCMOsareaccountingforagrowingshareofglobalpharmaceuticalproductionandasaresultofincreasingdemandforpharmaceuticalproductsintheregion,smallerAsianpharmaceuticalcompaniescanexpecttocontinuebenefittingfromtheoutsourcingofmanufacturingaswellasresearch.18
GivenAsia’srapidgrowth,andtheconfluenceofthesedifferentpharmaceuticalsectorbusinessmodelsintheregion,theregioniswellpoisedtoproducemanyoftheworld’smostcompetitiveandinnovativepharmaceuticalfirmsofthefuture.
18“Thechangingdynamics of pharma outsourcinginAsia:Areyoureadjustingyoursights?”,PricewaterhouseCoopers,2008
© The Economist Intelligence Unit Limited 2012 21
Asia Competition Barometer:Pharmaceuticals
Barometer methodology
Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometer.Drawinguponcompany-
leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
Assessingauniverseofover350publicly-listedpharmaceuticalcompaniesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthePharmaceuticalsector.
How do we define the pharmaceutical sector? Thepharmaceuticalsectorincludesthefollowing:manufactureofbasicpharmaceuticalproductsandpreparations,andthewholesaleofpharmaceuticalgoods.
Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.
Profitability IndexToassesstheaggregateprofitabilityofthepharmaceuticalsectorinAsia,theEconomistIntelligenceUnitdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:
• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDAexcludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.
• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasuresthe
© The Economist Intelligence Unit Limited 201222
Asia Competition Barometer:Pharmaceuticals
profitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.
• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.
• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.
• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.
Weaggregatedcompany-leveldatafor350publicly-quotedpharmaceuticalcompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).
Market concentration Profitability indicator Weight in Profitability Index
EBITDAmargin(%) 35%
Grossmargin(%) 35%
Returnoncapitalemployed(%) 10%
Returnonequity(%) 10%
Returnonassets(%) 10%
© The Economist Intelligence Unit Limited 2012 23
Asia Competition Barometer:Pharmaceuticals
Toassessmarketconcentration,theEconomistIntelligenceUnitcalculatedtheHerfindahl-HirschmannIndex(HHI)forthePharmaceuticalsectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover350listedcompaniesassessed.19HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toamonopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.
19Orsummedforallthefirmsin the case that there are fewerthan50.
Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out herein.