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The end of the pharma emerging market strategy?

18 February 2014 Mark Hollis

Recent newspaper headlines have been full of doom and gloom over the state of emerging market economies. From Turkey, to South Africa, and Argentina to Ghana, governments have been grappling with the next stage of the global financial crisis. Whilst many may suggest that standard economics has little to do with recession proof pharma, the European financial crisis has shown that pharma is not immune from the wider economic environment. It's therefore vital that pharma sit up and take notice of what's happening in the emerging markets before it's too late.

So what exactly is happening? Well it seems that as financial systems in mature markets begin to shake off the worst of the financial crisis and become more stable, investors have begun to flock back in while turning their backs on emerging markets. Apart from the obvious lack of investment, there have been a number of other nasty economic consequences of this exodus - including a sharp rise in interest rates, and declines in the value of local currencies against major international currencies.

Looking at Turkey, which is often seen as the bell weather for emerging market economic policy, the Lira has declined sharply against major currencies. For domestic pharmaceutical companies, the weakened Lira has translated to sizable increases in import costs. This is especially worrying as Turkish manufactures are highly reliant upon API imports. Higher import costs are, however, not only impacting local companies, but international companies as well. Higher costs of finished dose imports could mean a reluctance on the part of private payers and those paying-out-of-pocket to meet the costs of some treatments, especially the newest treatments. For drugs covered by price controls, heavily outdated price caps mean that companies have very limited scope to offer discounts. If this wasn't bad enough, companies may be dealt a further blow should the government attempt to reel in government expenditure, as Turkey's neighbor Greece has done.

Perhaps the greatest worry is that these concerns are now spreading beyond Turkey. Countries with similar pharmaceutical systems and weakening currencies such as South Africa and Argentina are already showing similar economic problems. Indeed, South Africa is moving to adjust its pricing mechanism to compensate local manufactures from surging costs brought about by the plummeting Rand.

It's not all doom and gloom though…..for some players - particularly local ones - in emerging markets may thrive. For example, Indian manufacturers who are not reliant upon international API imports, will see currency declines make their products more attractive to international payers.

However, for most players with an emerging market presence the next few years look like being a little bumpy. To better understand the risk associated with each country, our clients can utilize our pharmaceutical market access risk ratings. We provide them for many international markets -- and they are based on a number of factors including P&R regulations, economic conditions, and pricing.

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