FRX Forest Road Acquisition Corp

According to Irish orator, philosopher, & politician Edmund Burke, change is the most powerful law of nature. The winds of change seem to be sweeping across the pharmaceutical industry as well.

Until recently, most commercialization efforts were focused on the U.S. -- the largest pharmaceutical market -- along with Europe and Japan. However, with factors like pricing pressure in the European Union (EU) and intensifying generic competition affecting sales in large pharmaceutical markets, many leading players in the pharmaceutical space such as Pfizer (PFE), Bristol - Myers Squibb Company (BMY), Merck (MRK), Eli Lilly (LLY), GlaxoSmithKline (GSK), Astra Zeneca (AZN) and Sanofi-Aventis (SNY), have shifted their focus on emerging ("pharmerging") markets.

The key emerging markets targeted by big players in the pharmaceutical space (aka “Big Pharma") include China, Russia, Brazil, Mexico, Turkey, Korea and India.

Emerging markets represent significant commercial potential thanks to increased demand for medicines. Factors like increases in chronic diseases, population growth, government initiatives for healthcare, increasing use of generics and increasing prosperity are expected to drive growth in emerging markets.

The US and European markets are turning out to be relatively less attractive due to the impact of the health care legislation in the former and austerity measures in the latter.

According to data provided by the IMS Institute, spending on medicines in emerging markets will double to $285-$315 billion in the next five years from $151 billion in 2010, driven by strong economic growth coupled with endeavors of governments to expand access to healthcare. This will catapult "pharmerging" markets to the second position by 2015 in terms of spending on medicines.

Generic Threat? Emerging Markets to the Rescue

Since most of the Big Pharma players are likely to suffer significant losses in revenues following the genericization of key products, they are banking on growth in emerging markets to mitigate their losses.

With blockbuster drugs such as Pfizer’s Lipitor (anti-cholesterol) and Eli Lilly’s Zyprexa (schizophrenia and bipolar disorder) already off-patent in the US and other blockbuster drugs such as Bristol-Myers/Sanofi’s blood thinner Plavix, Forest Laboratories’ (FRX) Lexapro (anti-depressant) expected to follow suit shortly, sales of branded drugs in the US and EU are likely to suffer significantly in the coming years. Consequently, growth in emerging markets could help stabilize the core business during the industry's patent cliff in the 2010-15 period.

M&A Activity: Emerging Markets in Focus

With sales in the once dominant markets (US and EU) being impacted by the headwinds mentioned above, many leading players in the pharma space are increasing their exposure to emerging markets through mergers and acquisitions (M&A). By doing so, the companies are gaining access to low-cost manufacturing. Moreover, the Chinese, Indian, Brazilian, Eastern European and Russian markets are growing faster than the more mature US and European ones.

For example, pharma giant Abbott Laboratories (ABT) is leaving no stone unturned to expand its overall presence in emerging markets. Through the 2010 acquisitions of the pharmaceutical business Solvay Pharma (which has a strong presence in emerging markets) and Piramal Healthcare Solutions coupled with the licensing agreement with Zydus Cadila, Abbott has taken concrete steps to expand its presence in several highly populated, fast-growing emerging markets.

With the generic market going strong and likely to expand further thanks to patent expiries of blockbuster drugs, leading players such as Mylan Inc. (MYL) (Indian subsidiary Mylan Laboratories) and Novartis (NVS) (generic arm Sandoz having a strong presence in emerging markets like India) have been trying to make further inroads in the emerging markets.

The dominance of the generic market can be gauged from the data provided by the IMS Institute. The data reveals that market share for branded drugs will continue declining over the next five years. Branded drugs' market share, which declined from 70% in 2005 to 64% in 2010, is expected to decline to 53% by 2015, with generics accounting for a significant part of pharma spending.

Conclusion

In view of the above facts, we can safely say that the future of the pharmaceutical business is tied to emerging markets. In the face of increasing generic competition and other headwinds, the big names in the pharmaceutical world are turning to emerging markets to sustain growth and profitability.

 
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