The Incredible Shrinking Margin?

Looking to the next decade, the world's emerging market countries are in every pharma company's playbook for easy revenue gains. The assumption is that strong growth linked to rising discretionary incomes will compensate for aging demographics, patent losses, and tougher payer controls in the US, Europe, and Japan. CEOs on both sides of the Atlantic—from Chris Viebacher of Sanofi to Pfizer's Jeff Kindler—extol the potential of these markets, while IMS and other data forecasters project double-digit growth for years to come, boosted by the dividend of a vast, unregulated private-pay market for drugs.

But is this a sure bet? New developments in two pace-setting countries—China and Turkey—suggest that marketers are overlooking a rich and well-worn global currency in ideas for restraining drug margins. Emerging countries have the intellectual capital to import them all, regardless of whether anyone thinks the impact on industry is good or bad. Sales may jump but the profits that sustain global innovation could blur the gaze of starry-eyed manufacturers.

The Official Story ... Within five years, eight of the Top 20 Pharma Markets will be Emerging Market Countries

To help defray the cost of comprehensive health insurance reform, China has toughened its strategy on the monitoring and control of drug prices by placing its essential drugs list at the center of policy and cutting prices for nearly half the products on the list. According to the government, policy will be focused on slashing the high percentage of health spending devoted to medicines, making the essentials list an informal—but still critical—benchmark for pricing of all drugs, and phasing down the premiums given to patented, innovative medicines produced largely by foreign-based companies. R&D companies want to avoid having the essential drugs concept, geared to building access for the poor, override domestic support for innovation.

In Turkey, the government last month reacted to a surge in the public sector deficit with a sharp reduction in what R&D-based companies can charge for medicines referenced against a basket of prices in 10 European countries. Not only is the benchmark set at the lowest price in the basket minus 11 percent, companies will now have to lower that price by an additional 13 percent. As noted in the local daily Zaman, Turkey has set a path where it will now seek not simply to be an "average price" country for rewarding innovation, but "the lowest priced country." And there is potential for even more spillover, as price cuts could increase Turkey's allure as a source for parallel imports in Europe, effectively undercutting prices in a region that still hosts more than a third of the global market for medicines.

It's an important reminder that predatory pricing is contagious; because information is increasingly transparent, the impacts are cross-national. With funding support from European governments, the World Health Organization is building a database on drug prices that developing countries can use in their approaches to price regulation.

Another looming challenge is persuading the emerging markets to spend more. Most are punching well below their weight in the proportion of GDP devoted to health. Policies that subject patient status to price considerations are also problematic.

In addition to assessing the business impact of unplanned regulation, developments in these two high profile countries reveal the need to build a strong local market access capability. But the key question for strategists is whether—or how soon—the emerging markets will look like the rest of the world. Can we expect novel payer-partnership approaches or a rehash of the imposed regulations typical of "mature" Europe and Japan? It also suggests the pivotal importance of the US as the one market where flexibility in pricing is still the norm—and raises the stakes for industry on the outcome of the healthcare reform debate in Washington. — William Looney