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Renaud Savary is Senior Investment Analyst, Pharmaceutical Sector, at Avem Capital.
Branded generics in select emerging markets can offer above-market returns, writes Renaud Savary.
In the emerging markets, healthcare dynamics are fundamentally different to those in the developed geographies. Populations are largely undiagnosed and poorly treated, and hindered by strong limitations in terms of purchasing power, government reimbursement, quality medicine, access to healthcare and diagnosis. In such environments, what matters the most for authorities and patients is good-quality, accessible medicine at a reasonable price.
From a structural perspective, most emerging markets, such as Africa, Asia and Latin America are relatively similar. The top 5% of the population can afford imported big pharma products, IP protected or already in the public domain, which carry a 2ÂÂ–3x premium on other available products. They can afford unbranded generic imports from China and India, which are well priced, but of perceived weaker quality and not promoted on the retail market. They can also afford locally manufactured branded generics products, which can be sub-optimal in terms of product portfolio offer and commercial reach. The vast majority of volumes and market value in these markets are generated by branded generics, as opposed to unbranded or IP protected imports. A number of these markets are self-pay, meaning that patients pay the full price of the medicine from their pockets with no support from the government and limited presence of private insurance, something that does not happen in developed markets.
In terms of growth, pharmaceutical consumption is largely driven by GDP growth, with a ratio close to 2:1 in markets where diagnosis and treatments are sub-optimal. This means that in geographies where GDP growth is 5ÂÂ–10%, pharmaceutical markets grow 10ÂÂ–20%, driven by unmet needs and emerging middle class development. This is the typical pharmaceutical market growth of large parts of Africa, namely Nigeria, Algeria, Ethiopia, Uganda, and Egypt.
From a demand perspective, given perceived and/or real product quality issues and driven by historical scandals from outdated imports, patients have a strong preference for brands. For patients, brands typically carry a reassurance of quality, especially if they are manufactured locally. They are comfortable paying a 30ÂÂ–40% premium on other local or imported generics if the brand is perceived as strong and is well promoted commercially. As such, with the market’s structure and the population’s constraints/needs, high-quality branded generics that offer a broad range of products at an affordable price constitute an extremely attractive market opportunity in emerging markets.
There is a large void between expensive big pharma imports and cheap unbranded Chinese/Indian imports that is still not well served by local players, often lacking financial and technical firepower to improve their manufacturing standards and commercial/distribution footprints. Moreover, local manufacturing carries a strong political and national healthcare interest, as most governments need to reduce the import bills and increase technology transfer and know-how. They are often supportive of FDI and local investment through import constraints and tax cuts.
From an investment perspective, then, branded generics in select emerging markets can offer above-market returns, well beyond what is accessible in developed markets for pharmaceutical generics. This is driven by high local demand and sustainable margins. These margins are derived from a strong brand and effective promotion and distribution, which in turn enables price premium over unsophisticated local players and Chinese/Indian imports. Moreover, some of these pharmaceutical assets may also offer export opportunities in neighboring markets. These investments however, carry operational risks and sometimes exchange-rate exposure. With such risk, one needs to ensure the fundamentals are in place and compliance risk is mitigated.
Renaud Savary is a Senior Investment Analyst, Pharmaceutical Sector at Avem Capital.