Wipeout in Europe
Meanwhile, in Western Europe, government payers are shutting the fiscal spigot that used to finance generous drug benefits
under national health insurance, more than three quarters of which is subsidized from the public purse. Beginning in 2010,
the annual GDP per capita rise in outlays for medicines in the EU ground to a halt and has slipped into negative terrain since
then. Not only are company balance sheets trending red, so too are patient out-of-pocket costs. According to the OECD's latest
Health at a Glance report, the volume of such payments have increased by half in the 27 EU states since the recession began
Public debt loads at more than 100 percent of GDP, budget austerity, and the unsustainable social charges that feed it have
spawned predictions of a "lost decade" of revenue and profitability declines for Big pharma in Europe that will in turn choke
off any new biotech innovation, permanently sealing the region's fate as a marginal player in the global medicines market.
IMS forecasts that by 2016 only three European countries—Germany, France and Italy—will have a ranking on the top 10 world
markets list, down from five today.
"It's hard to be optimistic for any turnaround when the majority of the payers in Europe are technically bankrupt," says Peter
Tollman, senior partner and managing director of the Boston Consulting Group. Half of the world's spending on social transfer
payments takes place in Europe, while the region's economic output is only 25 percent of the world total. These numbers cannot
move farther apart without crowding out high-return public investments in research and innovation—investments that underpin
Europe's ability to compete against "cheap science" in the emerging markets. It is already happening, with possible withdrawal
of EU Commission funding for the Innovative Medicines Initiative (IMI), a novel, €2 billion discovery and development partnership
program—the largest in Europe—between governments and the industry.
Bloom off the BRICs
Prospects are brighter in the BRICs, yet their appeal has dimmed as the high-rent alternative to downsizing mature markets.
Under pressure to manage the expectations of a growing middle class, governments are responding by managing healthcare, with
foreign originator drugs a prominent target. China is dismantling preferential pricing for branded foreign drugs and moving
more products into a WHO-style essential drugs formulary; India and Indonesia have joined Thailand in actually enforcing that
"nuclear option"—compulsory licensing; and Turkey actively discriminates in holding up foreign drug maker certification for
local manufacture and distribution. Restrictive IP, price controls, and preferential "national champion" industrial strategies
are all geared to making domestic generics firms more competitive against the foreign multinationals. This is one compelling
reason for Big Pharma to stay active in the "pharmerging" countries, for the opportunity it provides to get intimate with
the future face of global competition.
However, learning to compete effectively in emerging markets is proving more costly than expected. To expand sales beyond
the traditional private-pay elite customer segment requires big ticket investments: in local manufacturing and distribution;
better on-site science; marketing that can tailor products for a diverse consumer base, often outside established urban centers;
new stakeholder outreach and partnerships; and in finding—and keeping—top performing talent. Because the fundamentals of big
populations and relative gains in disposable income are still there, 2013 should see continued uptick in Big Pharma sales
to the emerging bloc. The best performers will be the so-called "below the BRIC" countries like Indonesia and Saudi Arabia.
But the larger question remains: will bigger volume sales yield the profits companies need to counter Europe's price implosion
and continued regulatory uncertainty in the United States?
So goes Japan
And then there is the forgotten market: Japan, the aging, Asian Canada, but still the world's third largest in sales. The
biannual price plunge next appears in 2014, but there is an interesting story in the government's lavishly funded effort to
jump start a strong domestic vaccines business, capable of competing globally in research and production. Will it begin to
pay off in 2013, or is the picking winner model an anachronism?
Now, the good news
The last, best refuge of this industry is science—and after a spotty drought it looks like companies are once again delivering
the goods. The FDA approved a near record 39 new medicines in 2012, while the EMA is set to receive 54 new drug applications
this year, up sharply from 34 in 2010. More important, many of these products represent a significant therapeutic advance
in hard to treat areas like MS, rheumatoid arthritis, cancer, and hepatitis C. Likewise, the generic business is itself emerging
as a source of innovation in drug formulation and delivery, with complex generics that combine drugs in novel ways; Teva is
also a good bet to deliver the first biosimilar product approved by the FDA, sometime later this year.