Asia Competition Barometer - Economist Intelligence...

25
Asia Competition Barometer Pharmaceuticals An Economist Intelligence Unit report Supported by

Transcript of Asia Competition Barometer - Economist Intelligence...

Asia Competition Barometer PharmaceuticalsAn Economist Intelligence Unit report

Supported by

© The Economist Intelligence Unit Limited 2012 1

Asia Competition Barometer:Pharmaceuticals

Contents

Preface 2

Executive summary 3

Asia’s growing importance for corporate performance and global competitiveness 5

Competition and profitability at Asian firms 9 Competition: Marginal decrease in an extremely fragmented sector 9

Profitability:Slowgrowth 11

Case study: Glenmark Pharmaceuticals 13

Positioning for success in Asia 14 Sustainedgrowth 14

PatentexpirationswillleadtomorepartnershipsinvolvingAsiangenericsmanufacturers 15

Case Study: AstraZeneca 17

Case Study: Lonza 18

Outlook 19

Barometer methodology 21

© The Economist Intelligence Unit Limited 20122

Asia Competition Barometer:Pharmaceuticals

SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

ThisreportfocusesontheBarometerfindingsforthepharmaceuticalsector.Assessingauniverseofover350pharmaceuticalcompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthepharmaceuticalsector.

Otherreportsinthisserieslookattheinformationtechnologyservices,precisionengineering,transportandlogistics,andpetrochemicalsandchemicalssectorsinAsia.

March 2012

Preface

© The Economist Intelligence Unit Limited 2012 3

Asia Competition Barometer:Pharmaceuticals

Executive summary

WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth

prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals(MNCs).Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthopportunitiesoverthenextfewyears?

TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminesthepharmaceuticalsector,whichincludesthemanufactureofbasicpharmaceuticalproductsandpreparations,andthewholesalingofpharmaceuticalgoods.

Amongthekeyfindingsofthisreportarethefollowing:

• Asia’s pharmaceutical sector has been expanding rapidly, in line with the region’s strong economic growth and demographic changes.Severalbroadtrends,includingrisinghouseholdincomes,increasedgovernmentexpenditureonhealthcare,higherlifeexpectancies,consumerhealthawareness,andthegrowingincidenceofchronicdeveloped-worlddiseasesassociatedwithchanginglifestyleshaveallboosteddemandforpharmaceuticalproductsintheregion.AccordingtotheEconomistIntelligenceUnit(EIU),regionalpharmaceuticalsaleshavemorethandoubledfromUS$97bnin2001toUS$214.2bnin2010.By2016,theEIUexpectssalestohitUS$386bn,reflectinganannualaveragegrowthrateofmorethan13%.

• The number of players, homegrown and global, is rising.Thenumberandsizeofpublicly-listedfirmsinthepharmaceuticalsectorinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesin

© The Economist Intelligence Unit Limited 20124

Asia Competition Barometer:Pharmaceuticals

theindustryroseby34%between2004and2009,from276firmsto370.TotalcombinedrevenuesnearlytripledfromUS$27.4bntoUS$73bnduringthesameperiod.

• Global companies are investing heavily in Asia across sales and marketing, R&D, and manufacturing.GlobalpharmaceuticalfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestotheregion.Furthermore,whileAsiawasonceviewedasanattractivedestinationonlyforsimpleoutsourcedproduction,theregionisincreasinglyseenasakeyR&Dhub.

• Despite a slight increase in market concentration, competition in Asia’s pharmaceutical sector remains fierce.Amongpublicly-listedAsianfirms,theindustry’slargestplayersincreasedtheirmarketsharebetween2004and2009.However,Asia’spharmaceuticalsmarketremainshighlycompetitiveandextremelyfragmented,withthousandsofsmallermanufacturers.Thebiggestfirmshavebeenabletogrowtheirmarketsharepartlythroughfiercepricecompetition,astheyenjoyscaleefficienciesandlowerdistributioncosts.Risingincomesintheregionhavealsocontributedtoincreasedmarketshareasmoreconsumerscanaffordbrandedpharmaceuticalsandelectivetreatments.Nevertheless,therewillcontinuetobeopportunitiesforsmallfirmsthatcanprovidespecificservices,suchascontractmanufacturingorresearchworkforlargercompanies.

• Even though operating revenues almost tripled from 2004 to 2009, profitability has not increased dramatically due partly to increases in material costs and overall wages.Forinstance,theaveragecostofemployeesincreasedby50%fromUS$6,000toUS$9,000between2004and2009.The2008globaldownturndidhaveanimpactonprofitability,butitseffectsweremutedcomparedtomanyotherindustries.Thisisbecauseproductsinmanysegmentsofthepharmaceuticalmarketareconsiderednecessities,andhencearesomewhatrecession-proof.

• The end of patent protection for some blockbuster drugs is leading to more partnerships between generics manufacturers and big brand pharmaceutical firms.Thisyear(2012)marksthesteepestpointofthesocalledpatentcliff,whenmanyblockbusterdrugscomeoffpatent,andmanyglobalpharmaceuticalfirmsarelookingtoAsiatocounterfallingrevenuestreams.Theyaremovingheadcountfromdevelopedtoemergingmarkets,includingAsia,andmakingstrategicacquisitionsofgenericsmanufacturersinordertodiversifytheirbusiness.

© The Economist Intelligence Unit Limited 2012 5

Asia Competition Barometer:Pharmaceuticals

Asia’s growing importance for corporate performance and global competitiveness

Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.1

By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.ThereareseveralbroadtrendsthathavebeendrivingAsia’spharmaceuticalsector.Thefirsttrendis

demographicchangethatisboostingmarketdemand.ManyAsiancountrieshavebeenexperiencingrapidpopulationgrowth.India’spopulation,forexample,grewfrom1.02bnin2001to1.18bnin2010.TheEIUexpectsittoreach1.29bnby2016(seeFigure1).

Populationgrowthhasbeentheresultofnotonlyhighbirthratesinsomecountries,butincreasedlifeexpectancyinmostcountries(seeFigure2).Onarelatednote,thoseAsiancountrieswithlowbirthrates,suchasChina,JapanandSingapore,arenowfacingageingpopulations,whichpresentsgrowthopportunitiesforpharmaceuticalcompaniesmakingspecialiseddrugsfordiseasescommonamongtheelderly.

1AsiahereincludesBangladesh,China,HongKong,Indonesia,India,Japan,SouthKorea,Malaysia,Myanmar,Philippines,Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam

Figure 1: Population(m)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000JapanIndonesiaIndiaChinaAsia

2016201520142013201220112010200920082007200620052004200320022001

Source: BPS; China National Bureau of Statistics; EIU; US Bureau of Census

© The Economist Intelligence Unit Limited 20126

Asia Competition Barometer:Pharmaceuticals

Theseinter-relateddemographicfactors—higherlifeexpectancies,populationgrowth,andtheoverallageingofsomepopulations—havetogetherboosteddemandforavarietyofpharmaceuticalproducts.

Thesecondtrendisrisingincomes,whicharedrivingdemandforbetterdrugsandmedications.IncomeshaverisendramaticallyacrossAsiaoverthepasttenyears,inlinewithoveralleconomicgrowth,boostingover–the-counterdrugpurchases.Moreover,abouthalfofAsia’spopulationstilllivesinruralareas,buttheytoonowhavegreateraccesstomainstreammedicinesbecauseofwidespreadpublicandprivatesectoreffortstobroadenaccesstohealthcare.IncreasingaffluenceandeducationalstandardsinAsiaarealsoraisinggeneralhealthawarenessamongconsumers,furtherboostingdrugsales.

Thethirdtrend,whichisdriveninpartbythesecond,islifestylechange.AsAsianshavebecomericher,theirdietsandhabitshaveevolved.Forexampletheynoweatmoremeatanddrinkmoresweetenedbeverages.Thishasbeenaccompaniedbyanincreaseintheincidenceofso-calleddeveloped-worlddiseases,includingcancer,diabetesandheartailments.Forexample,ChinaandIndianowhavetheworld’slargestdiabeticpopulations,withsome51mand43mpeoplerespectively.2ExpertsbelievethattheprevalenceofdiabetesinAsiawillriserapidlybetweennowand2030(seeFigure3).

Meanwhile,governmentsintheregionhavebeeninvestinginhealthcareinfrastructureandservicesinordertoalleviatetheburdenonhouseholdsandtocopewithchangingdiseaseprofiles.AuthoritiesincountriessuchasChina,IndiaandIndonesiahavebeentryingtobroadenbasichealthcoveragethroughnationalinsuranceschemes.Thiscombinationofpublicandprivatespendinghasledtoasteadyrisein

Figure 2: Life expectancy(years)

0

20

40

60

80

100

VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina

2001 2016

Source: US Bureau of Census; Economist Intelligence Unit

2Shawetal,“Globalestimatesoftheprevalenceofdiabetesfor2010and2030”,Diabetes Research and Clinical Practice,Vol87,Issue1,Jan2010,pages4-14

Figure 3: Diabetes prevalence(%)

0

3

6

9

12

15

Vietnam China Indonesia Taiwan Philippines Japan Australia India Thailand S Korea Malaysia Sri Lanka

2010 2030

Source: Shaw et al, “Global estimates of the prevalence of diabetes for 2010 and 2030”, Diabetes Research and Clinical Practice, Vol 87, Issue 1, Jan 2010, pages 4-14

© The Economist Intelligence Unit Limited 2012 7

Asia Competition Barometer:Pharmaceuticals

percapitahealthcarespendingintheregion(seeFigure4).Thisrisinghealthcarespendinghasbenefitedthepharmaceuticalsector.AccordingtotheEIU,the

pharmaceuticalmarkethasgrownrapidlyinAsia,withsaleshavingmorethandoubledfromUS$97bnin2001toUS$214.2bnin2010.By2016,theEIUexpectsittohitUS$386bn,reflectinganannualaveragegrowthrateofmorethan13%.

Figure 4: Healthcare spending(per head, US$)

0

500

1,000

1,500

2,000

2,500

3,000

VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina

2010 2030

Note: Total public and private expenditure on health, per capita.

Source: Epsicom; WHO; EIU

Asiahasbecomeincreasinglyimportantasamarketforlargeglobalpharmaceuticalcompanies.Forexample,in2010Asiaaccountedfor21%ofglobalrevenuesatBayer,aGermanchemicalandpharmaceuticalcompany,upfromjust10%in1990.3

Between2004and2011,fDiMarkets,adataprovider,recorded653cross-borderinvestmentprojectsinAsiafrom321companiesinthepharmaceuticalandbiotechnologyspace,worthatotalofUS$28.6bn.Some70%ofthesewereinthepharmaceuticalsectorandtherestinbiotechnology.Chinawasthelargestrecipientwith186inwardinvestmentsandwascloselyfollowedbyIndiaandSingaporewith157and94investmentsrespectively.

GlobalpharmaceuticalfirmshavebeenmovingintoAsiatotapitsburgeoningmarket,andtolowertheirproductioncostsbyshiftingcapacityfromhigher-costcountriestotheregion.TheregionisalsoincreasinglyseenasakeyR&Dhub,givenitslowcostsandhugetalentpools.Ofthe653cross-borderpharmaceuticalsandbiotechnologyinvestmentsthatfDiMarketsrecordedinAsiafrom2004-2011,R&Daccountedfor200projects(31%),comparedtomanufacturingwith175(27%)andmarketingandsupportwith168(26%).

BritishfirmGlaxoSmithKline(GSK),SwisscompanyNovartis,andGermany’sBayerledtheinvestmentchartsoverthisperiodwith21,16and13projectsrespectively.Theseprojectsvaryinscope.Forinstance,NovartishasinvestedheavilyinbiotechnologyanddrugdiscoveryunitsinplacessuchasShanghaiandSingapore.Amongotherthings,BayerhasbeeninvestinginR&Dfordiseases,suchaslivercancer,thathaveahigherincidenceinAsia.OneofGSK’srecentinvestmentsisinanewcallcentreinOkinawa,Japan,wherepharmacistswillrespondtorequestsfrommedicalprofessionalsaswellasconsumers.

3Bayercorporatewebsite

© The Economist Intelligence Unit Limited 20128

Asia Competition Barometer:Pharmaceuticals

“AsiaPacificisnowseenasthekeygrowthopportunityintheshorttomediumterm,andhencecompaniesareincreasinginvestmentlevelstocapturethatgrowth,”saysMarkMallon,regionalvicepresidentAsiaPacificandpresidentChinaatAstraZeneca,aBritishbiopharmaceuticalfirm.

© The Economist Intelligence Unit Limited 2012 9

Asia Competition Barometer:Pharmaceuticals

Competition and profitability at Asian firms

Thenumberandsizeofpublicly-listedfirmsinthepharmaceuticalsectorinAsiahasincreaseddramatically.Thenumberoflistedcompaniesincreased34%between2004and2009,from276firms

to370.Overthesameperiod,thetotalcombinedrevenueofpublicly-listedpharmaceuticalcompaniesalmosttripledfromUS$27.4bntomorethanUS$73bn.

Competition: Marginal decrease in an extremely fragmented sectorAsia’spharmaceuticalsectorisextremelyfragmented,withthepresenceofnumeroussmallermanufacturers.JustinIndia,forexample,therearemorethan10,000pharmaceuticalcompanies,mostofwhicharesmall.

TocapturetheintensityofcompetitioninthepharmaceuticalsectorinAsia,wehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHIvaluescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).TheHHIforAsia’sT&Lindustryincreasedfrom1.54in2004to1.99in2009(seeFigure5),signifyingthatthe50biggestfirmsintheBarometerincreasedtheirmarketconcentrationmarginallyoverthatperiod.4

Inotherwords,althoughmanynewplayershaveenteredthemarket,thebiggestfirmshavemanagedtomarginallyincreasetheirmarketshare.Thatsaid,thebiggestpharmaceuticalfirmsdominatelessthandothebiggestfirmsinsomeotherindustries.Forinstance,theHHIreadingforthepharmaceuticalsectorin2009(1.99)ismuchlowerthanthatoftheinformationtechnologyservicessector(5.73)andtheprecisionengineeringsector(9.30).

Thethreelargestpharmaceuticalcompaniesbyturnoverin2009—SinopharmGroup,ShanghaiPharmaceuticalsandNanjingPharmaceutical—enjoyedacombinedrevenueshareofjust18.5%in2009,upfrom14.8%in2004(seeFigure6).

4Ameasureofthesizeofcompanies in relation to the industry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof350listedcompaniesassessed.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.

© The Economist Intelligence Unit Limited 201210

Asia Competition Barometer:Pharmaceuticals

Figure 5: Herfindahl–Hirschman Index

1.00

1.25

1.50

1.75

2.00

200920082007200620052004

Source: Economist Intelligence Unit

2004 2005 2006 2007 2008 2009

Herfindahl—Hirschman Index (HHI) 1.54 1.37 1.75 1.75 1.76 1.99

Thebiggestfirmshavebeenabletogrowtheirmarketsharethroughfiercepricecompetitionandindustryconsolidation.Manyofthenewplayerswereundoubtedlyunabletocompetewiththescaleefficienciesandlowerdistributioncostsofthelarger,establishedplayers.Meanwhile,China’sgovernmenthasbeenleadingadrivetopushconsolidationinthehighlyfragmentedsector,andhencelargefirmssuchasSinopharmandShanghaiPharmaceuticalsareexpectedtocontinuetheiracquisitionspreesin2012-2016.

AnotherreasonfortheincreasedmarketshareofthelargestAsianfirms,accordingtoAchinGupta,seniorvicepresidentofcorporatestrategyatGlenmarkPharmaceuticals,anIndianfirm,isthatwithrisingincomesmoreAsianscannowaffordsomeoftheexpensivetreatmentsthatthebigfirmslicense,suchasthosefordiabetes.InMrGupta’sview,thistrendhashadafargreaterimpactthantheglobalfinancialcrisisonthesmallerfirms’marketshare.

Competitionislikelytoremainintense,particularlyasglobalpharmaceuticalmajorswillbelookingtocushiontheirlossofpatenteddrugrevenuesthroughstrategicacquisitionsofgenericsmanufacturersin

Figure 6: Top ten companies by turnover

Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)

SinopharmGroup China 2.17 7.14

ShanghaiPharmaceuticals China 1.64 4.71

NanjingPharmaceutical China 0.8 2.13

RanbaxyLaboratories India 1.22 1.7

ShenzhenAccordPharmaceutical China 0.24 1.66

HarbinPharmaceuticalGroup China 1.08 1.6

DrReddy’sLaboratories India 0.42 1.59

Cipla India 0.55 1.27

Max India India 3.31 1.27

HuadongMedicine China 0.44 1.18

Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam

© The Economist Intelligence Unit Limited 2012 11

Asia Competition Barometer:Pharmaceuticals

theregion.TheywillbechallengedbyseveralAsianpharmaceuticalmanufacturerswhoarefightingforabiggershareofthegenericsmarket.

Meanwhile,smallerAsianpharmaceuticalfirmswillcompetetoprovidespecificservices,suchascontractmanufacturingorresearchworkforlargercompanies.Forinstance,Bristol-MyersSquibb,anAmericanpharmaceuticalfirm,andWuXiPharmaTech,aShanghai-basedcontractresearchorganisation(CRO)specialisinginpharmaceutical,biotechnologyandmedicaldeviceR&D,announcedinMarch2011thattheyhaveenteredastrategicpartnershipthroughwhichWuXiwillconductstabilitystudiesonnewchemicalentities.Thisisanextensionofalong-standingalliancebetweenthetwofirms,oneofmanybetweenCROsandbigpharmaceuticalfirmstohaveemergedoverthepastfewyears.

Similarly,Asiancontractmanufacturingorganisations(CMOs)willalsoseektosecuremoreworkfrombigpharmaceuticalfirms.Todoso,theywillhavetocompetewithregionalandWesternCMOs.“TheabilitytoprovidestrictadherenceandtopqualitywillbethekeytoseparatethetopCMOsfromtheaverageCMOs,”saysMichaelBrown,vicepresidentofoperationsatLonzaBiologicsinSingapore.HesaysoneofthecurrentcompetitiveadvantagesforWesternCMOsisthatsomecustomersarestillconcernedaboutstandardsatAsianfirms.ThemainperceivedadvantagesofWesternCMOsare“consistentquality,reliability,IPprotectionandexperience,particularlyinthebiologicsdevelopment,”headds.

Profitability: Small increaseTomeasuretheprofitabilityofthepharmaceuticalsector,wedevelopedacompositeindexoffiveratioswhichmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AccordingtoourBarometer,withtheexceptionofgrossmargin,allotherprofitmarginshaverisenrelativeto2004(seeFigure7).

Figure 7: Profitability Index

90

105

120

135

150

200920082007200620052004

Source: Economist Intelligence Unit

2004 2005 2006 2007 2008 2009

Profitability index 102.5 100.0 103.8 110.8 102.6 109.3

EBITDAmargin(%) 13.1 12.6 13.3 14.2 13.4 13.7

Grossmargin(%) 40.3 39.2 37.7 38.5 37.9 38.4

Returnoncapitalemployed(%) 11.1 10.9 14.2 17.1 12.7 16.4

Returnonequity(%) 8.3 8.8 13.9 17.4 12.4 16.9

Returnonassets(%) 3.6 3.7 6.0 7.8 5.6 8.1

© The Economist Intelligence Unit Limited 201212

Asia Competition Barometer:Pharmaceuticals

TheProfitabilityIndexforAsia’spharmaceuticalindustryincreasedfrom102.5in2004to109.3in2009.5ProfitabilityinAsia’spharmaceuticalsector,whichwasatitshighestin2007,sawanoticeabledipin2008,beforebouncingbackin2009.

The2008globaldownturndidhaveanimpactonprofitabilityintheregionalpharmaceuticalsector,butitseffectsweremutedcomparedtomanyotherindustries.Thisisbecauseproductsinmanysegmentsofthepharmaceuticalmarketareconsiderednecessities,andhencearesomewhatrecession-proof.AccordingtoIMShealth,anindustryresearchfirm,pharmaceuticalconsumptioncontinuedtogrowthroughtherecessionandgloballyonlyEstoniaandLatviasawanoveralldeclineinpharmaceuticalconsumptionbyvolume.6

Despiteoperatingrevenuesalmosttriplingfrom2004to2009,profitabilityhasnotincreaseddramaticallyduepartlytoincreasesinmaterialcostsandoverallwages.Forinstance,theaveragecostofemployeesincreasedfromUS$6,000toUS$9,000between2004and2009.Overthatsameperiod,theindustry’stotalemployeecostsincreasedfromUS$1.1bntoUS$3.5bn.

Overthenextfewyears,MrMallonbelievesthatpharmaceuticalfirmswillhavetoreducetheircostbase,whileaddressingever-changingcustomerdemands—duetorisingincomesandchangingdiseaseprofiles—andimprovingaccesstomedicinesinordertoboostprofitability.Whilerecognisingtheneedtocutcosts,MrGuptaisalsobullishabouttheregion’sgrowthprospects.HesaysbothAsianaswellasnon-Asianpharmaceuticalcompaniesaregoingtoberelyingonthe“increaseinaffordabilityofdrugsduetoGDPgrowth,betterhealthcaresystemsandmoreextensivehealthcareinfrastructure”forprofitabilitygrowthinAsia.Manycompaniesaretryingtocaptureabiggerportionofthisgrowingpiebyincreasingtheirproductofferingsandexpandingtoruralareas.

6“Theimpactoftheeconomicdownturnonglobalaccesstomedicines”,IMSHealthfortheWorldHealthOrganisation,Jan2009

5ThecompositeProfitabilityIndexismadeupoffiveratios that each represents a different aspect of a company’sprofitability.Formore information on the Barometermethodology,please refer to the last section inthisreport.

© The Economist Intelligence Unit Limited 2012 13

Asia Competition Barometer:Pharmaceuticals

Case study: Glenmark Pharmaceuticals

Glenmark Pharmaceuticals: The benefits of longstanding presenceGlenmarkPharmaceuticals,anIndianpharmaceuticalcompany

withoperationsinspecialty,genericsandout-licensing,hasseensalesincreasefromRs6.04bn(US$138mat2005exchangerates)in2004/05toRs29.5bnin2010/11(US$645.2mat2010exchangerates),oratacompoundannualgrowthrateofnearly31%.IndiaandSouth-eastAsiatogethercontributearound25-30%ofitsoverallprofits,andabout50%ofitsbrandedbusinessincome.

AchinGupta,thefirm’sseniorvicepresidentofcorporatestrategy,saysalthoughIndiaisakeymarket,thecompanyisgrowingevenfasterinsomeotheremergingmarketssuchasBrazil,Mexico,theCIS,RussiaandEasternEurope.“Ourbrandedgenericsbusinessisgrowingatabout40%outsideofAsia,”hesays.

CompetitioninAsiahasincreasedoverthepastfiveyears,MrGuptasays,largelyduetotwofactors.Firstistheincreasedinterestfrommultinationalsintheworld’semergingmarkets.SecondisthegrowthofIndianfirms.“Wewentfromhavingasalesforceofabout1,200-

1,500in2005/06toasalesforcethatisabout3,000-strongtoday,”MrGuptasays.“Moreover,theabilityofIndiancompaniestoplayintheglobalgenericsmarkethasgiventhemadditionalfundsthatarebeinginvestedinIndia.”

MrGuptasaysthatbrandequityhasbeenabigdriverofprofitabilityinAsia.“Leadingbrandswouldtypicallycommandaslightpremiumoverlesserknownproductsandtheywouldstillsellasaresultofconfidenceplacedinthembydoctors,”hesays.“Theperspectivewasthattheseproductswereofhigherquality.”Hebelievesthistrendwillcontinueforatleastthenextfiveyears.OtherfactorssuchasGDPgrowth,widerinsurancecoverageandbetterhealthcareinfrastructurewillallincreasedrugpenetration.Theywillalsoopenupopportunitiesforelectivetreatmentsandothermoreexpensivetreatments.

However,onefactorMrGuptathinkscoulddampenprofitabilityisthe“threatofreferencepricingcominginIndiawherethetopthreebrandsintheindustrywillbeusedasareferencepricefortherestofthecompanies.”Additionally,heworriesaboutpricecontrolsthatarealreadyprevalentinafewcountrieswheregovernmentbuysmostofthedrugs.“Theyissuetendersandtheseareveryprice-competitive,”hesays,pushingdownprofitability.

© The Economist Intelligence Unit Limited 201214

Asia Competition Barometer:Pharmaceuticals

7“India’spharmaceuticalindustryoncourseforglobalization”,DeutscheBankResearch,Apr9th2008

Figure 8: Pharmaceutical sales(US$ bn)

0

50

100

150

200

VietnamThailandSingaporePhilippinesMalaysiaIndonesiaIndiaChina

2010 2016

Source: EIU; Epsicom

Positioning for success in Asia

Sustained growth

Overthenextfewyears,globalpharmaceuticalfirmswillbeincreasingtheirpresenceintheregioninordertotapthegrowingmarket,lowertheirproductioncosts,andimprovetheefficiencyof

theirR&Dprocesses.MrGuptaatGlenmarkPharmaceuticalssaysthatmostfirmsareexpectinggrowthof15%perannumintheAsianmarketsoverthenextfivetotenyears.Thepharmaceuticalmarketsoftheeightcountriescoveredinthisstudyaresettoexpandrapidlyoverthenextfewyears,ledbyChina(seeFigure8).

Severalfactorswillcontinuetodrivegrowthintheregion’spharmaceuticalsector.Firstistheregion’sseculargrowthstory.SecondisAsia’scontinuedattractivenessasamanufacturingdestination.WagesintheIndianpharmaceuticalsector,forinstance,arejust30%ofEuropeansalariesor20%ofthoseintheUS.7Amongotherthings,AsiahasbecomeanimportantdestinationforthedevelopmentofvaccinesfordiseasessuchasHepatitisAandB,andseasonalinfluenza.

Third,morefirmsareinvestinginR&DinAsia.ThecostofclinicaltrialsinIndia,forinstance,isabout

© The Economist Intelligence Unit Limited 2012 15

Asia Competition Barometer:Pharmaceuticals

halfofwhatitisintheUS,andtotalR&Dsavingscanbeofasimilarmagnitude.8Asiahasalargetalentpool,offeringitahugehumancapitaladvantageoverotherregions.ThenumberofdoctoratesawardedinthenaturalsciencesandinengineeringhaseitherleveledofforfallenincountriessuchastheUS,theUKandGermanysincethelate1990s,saysPWC,aconsultancy,whilstithasbeenincreasingsteadilyinAsia,suggestingthatAsia’stalentandknowledgebaseisincreasing.9

GlobalpharmaceuticalfirmshavethereforebeeninvestinginAsia.Forexample,Sanofi,aFrenchpharmaceuticalfirm,saidinOctober2011thatitwillsetupamanufacturingplantinHyderabad,India.ThecompanywillinvestRs5bn(US$102.9m)inthefacility,whichwillproducevaccinesforthelocalmarketandmaybegintheproductionofotherproductsfordiabetestreatment,animalhealthandconsumerhealthcare.In2009,thecompanyacquiredHyderabad-basedShanthaBiotechnicsinadealvaluingthecompanyat€550m(US$764.5m).ItsVietnamesesubsidiaryalsoplanstobuildathirdpharmaceuticalplantinHoChiMinh,Vietnam.Similarly,AstraZenecaisinvestingUS$230minanewmanufacturingplantinChinaMedicalCityinChina’sJiangsuprovince.Thenewsiterepresentsitslargesteverinvestmentinasinglemanufacturingfacilityglobally.10

ThistrendofinwardinvestmentsinthepharmaceuticalsectorwillcontinueinthenextfewyearsasthebigglobalcompanieslooktoprofitfromAsia’suniquepositionasahubforthemanufactureofgenericdrugs,adestinationforcheaperproductioncostsandafast-growingpharmaceuticalmarket.

WhiletheopportunitiesinAsia’spharmaceuticalindustryarelarge,soaretherisks.GovernmentsaroundAsiaarestillintheprocessofdetermininghowbesttodesignandfinancetheirhealthcaresystems.Somedecisionswillhaveaprofoundimpact.Forexample,MrGuptabelievesthatregulatoryshiftssurroundingtheuseofauthorisedgenerics(referredtobysomeasbrandedgenerics)willgreatlyinfluencetheindustry.TherehasbeensomepushbackinEuropeandtheUSagainsttheuseofauthorisedgenerics.AiswariyaChidambaram,ananalystatFrost&Sullivan,aresearchhouse,concludesinanarticlethat“prohibitingthelaunchofauthorisedgenericsduringthe180daysexclusivityperiodwillnotonlyhelpindependentgenericfirmsgaincommendableprofitbutwillalsofacilitateeasieraccesstoaffordablemedicineforconsumers.”11

MrGuptasaysthatpressuresmayforcesomeAsianmarketstoimplementasimilarbanonauthorisedgenerics.Thiswouldhurtbigpharmaceuticalfirmsbutbenefitgenericsmanufacturers.Onarelatednote,MrMallonwarnsthathealthcareanddrugpayorsareunderpressuretoincreaseadoptionofcheapergenericalternativesinordertoreduceoverallhealthcarecosts.GlobalfirmswillneedtocarefullymonitorregulatorydevelopmentsaroundAsiaastheyplantheirmarketstrategies.

Patent expirations will lead to more partnerships involving Asian generics manufacturersBigglobalpharmaceuticalproducersfaceseriouschallengesoverthenextfewyears,asmanyoftheirblockbusterdrugshaveeithergoneoff-patentorsoonwill,hurtingtheirprofitability.AnumberofpopulardrugswilllosetheirpatentprotectionintheUSthisyear,leavingtheirproducersexposedtocompetitionfromgenericsmanufacturersandslashingtheirrevenuesbyupto40%.12GlobalratingsagencyFitchestimatesbrandeddrugswithsalesofUS$21bnwentoff-patentin2011,andanotherUS$52bnworthofbrandeddrugsaresettolosetheirpatentsin2012alone.13Theexpiryofpatentscould

8“India’sEmergenceasaGlobalR&DCenter”,SwedishInstituteforGrowthPolicyStudies,Dec2007

9“Pharma2020:Thevision–Whichpathwillyoutake?”,PricewaterhouseCoopers,Jun2007

10“Ground-breakingofAstraZeneca’sManufacturingFacilityinChinaMedicalCity”,AstraZeneca,Jan6th2012

11“AuthorisedGenerics:BoonorBane?”,Frost&Sullivan,Aug12th2011

12“Industriesin2012”,EconomistIntelligenceUnit,Dec21st2011

13“Indianpharma’soutlookstablefor2012,saysFitch”,Pharma Times,Feb2nd2012

© The Economist Intelligence Unit Limited 201216

Asia Competition Barometer:Pharmaceuticals

beahugedriverforthesalesofAsiangenericmanufacturerswhostandtobenefitmostfromtheso-calledpatentcliff.Inresponsetotheimpendingdropinrevenues,bigpharmaceuticalcompaniesarerethinkingtheircorporatestrategiesandredeployingtheirresources,generallytowardsR&Dandemergingmarkets.

Inthefourthquarterof2011,Pfizer,anAmericanfirmandtheworld’slargestdrugmanufacturer,sawa24%fallinitssalesofLipitor,largelyduetoa42%declineintheUS.ThiswasduetocompetitionfromgenericversionsofthecholesteroldrugandthelossofpatentprotectionforthedrugintheUSinNovember2011.PfizersaidlastyearitwouldattempttoslashitscoststhroughlayoffsofthousandsofresearchersinordertocompensateforthedecliningsalesofLipitor,oncetheworld’stopsellingdrug.14

Similarly,AstraZenecaannouncedinFebruary2012thatitwouldlayoff7,300employeesor12%ofitsworkforceoverthenexttwoyears,asmanyofthecompany’stop-sellingdrugpatentsareexpiringoverthenextfiveyears.Reflectingitsshiftingpriorities,thefirmhasalsohired“thousandsofnewemployeesforitsexpansionintoemergingmarketsandforresearchingandproducingbiotechdrugs”.15

CompaniesthatstandtobenefitmostfromthesepatentexpirationsaregenericsdrugmanufacturerssuchasIndia’sRanbaxyandDrReddy’sLaboratories.Thegenericsmarket’sgrowthprospectsaregoodalsobecausegovernmentsinmanycountrieswithpubliclyfundedhealthcareplansarelookingtocurboveralldrugspending.

AccordingtoDatamonitor,adataprovider,theAsiaPacificgenericsmarketexpandedatacompoundannualgrowthrateof13.5%between2006and2010toreachUS$44.8bninrevenues.Itexpectsthemarkettogrowby12%in2010-2015toreachUS$79bnby2015.

Inanticipationofthisshiftingcompetitivelandscape,bigglobalpharmaceuticalfirmshavetriedtogetafootholdinthisgenericsindustrythroughstrategicacquisitions.Forinstance,in2008Japan’sDaiichi-SankyoacquiredacontrollingstakeingenericsmanufacturerRanbaxyLaboratoriesforUS$4.6bn.Twoyearslater,US-basedAbbottLaboratoriesacquiredthegenericsbusinessofPiramalHealthcareforUS$3.7bn.TheserepresenttwoofthelargestacquisitionsacrossallsectorsinIndia.Meanwhile,Israel’sTevaPharmaceuticalIndustriesisalsolookingatacquisitionsinAsia,aregionwhereitexpectsgenericssalestoboom.16

MrGuptaatGlenmarkPharmaceuticalssaysweareseeingglobalplayerssteppingintotheauthorisedgenericsarena.“ThereisincreasingacceptanceonthepartofMNCstocustomisetheirofferingstomarketslikeIndiaandotherleadingmarketsintheregionsuchasMalaysiaandthePhilippines,”hesays,addingthatthistrendisgoingtocontinue.

Thegenericsmanufacturersalsostandtobenefitfromsuchstrategicacquisitionsorpartnerships.Forinstance,AsiangenericsmanufacturershaveoftenhadatoughtimesellingtheirproductsinWesternmarkets.Theyarefacedwithavarietyofobstaclessuchaslegalchallengesfrompatentowners,difficultiesinmeetinginternationalregulatoryandqualitystandardsandfiercecompetition.Partnershipswithglobalpharmaceuticalcompaniescanhelpthemovercomethesechallenges.Inaddition,throughpartnershipswithbigpharmaceuticalfirmswithcutting-edgetechnologies,genericsmanufacturerscanmoveupthevaluechainandbecomemoreinnovative.

However,suchpartnershipsandacquisitionsdohavetheirpitfalls.Forinstance,criticssuggestthatDaiichi-SankyodidnotconductthoroughduediligenceonRanbaxy,andinitsquesttobuyamaturecompanywithasignificantpresenceinthegenericssegment,thecompanymayhaveoverpaid.17

14“Pfizertrims2012view,citingstrongerdollar”,Reuters,Jan31st2012

15“AstraZenecaplanstocut7,300jobs”,The Wall Street Journal,Feb3rd2012

16“TevaeyesmoreacquisitionsinAsia”,Pharma Times,Jan12th2012

17“DaiichiYettoGainfromRanbaxyBuy”,The Wall Street Journal,Mar16th2011

© The Economist Intelligence Unit Limited 2012 17

Asia Competition Barometer:Pharmaceuticals

Case study: AstraZeneca

AstraZeneca: Emphasis on innovationAstraZeneca,aglobalbiopharmaceuticalcompany,sawAsiaPacific

salesrisemorethan7%in2011toreachUS$6bn.MarkMallon,thefirm’sregionalvicepresidentofAsiaPacificandpresidentofChina,saysAsiais“afundamentallyattractive,highgrowthregion”forthepharmaceuticalindustry.Overthenextfewyears,heexpectsthesectortoexperiencestrongdouble-digitgrowthinemergingmarketssuchasChina,VietnamandIndia,andlowsingle-digitgrowthinthemorematuremarketssuchasAustralia,JapanandTaiwan.

AccordingtoMrMallon,competitioninthepharmaceuticalsectorinAsiahasintensifiedasmajorpharmaceuticalcompaniesstepuptheirinvestmentsintheregionacrosssalesandmarketing,R&D,andmanufacturing.Heexpectsthistrendtocontinue.“Competitionfromgenericfirmshasalsoincreased,bothinestablishedandemergingmarkets,”hesays.Inhisview,competitionfromAsianpharmaceuticalfirmstendstobemoreintenseinmarketsandsegmentswithahighgenericspenetration.

MrMallonemphasisesthatprofitabilityintheindustryhasbeendrivenbyinnovation—bothintermsofnewproductsandnewcommercialmodels—andagrowingfocusoncosts.Headdsthat“Asia’sstronghistoryofinnovationpresentsanenvironmentwherecreativitycanflourish”.AstraZeneca,hesays,isinnovatingacrossabroadrange

ofitsactivitiesintheregion,“fromthewaywepartnerwithotherorganisationstothewaywefundnewresearchanddeliverhealthcareservices”.

Onarelatednote,MrMallonalsobelievesitisimportantfortheindustrytoaddressthegrowingneedsofpayorsandtoimproveaccesstomedicines.Thereis“anunder-servedpopulationofpeoplewhocanonlyaccesslimitedhealthcareinfrastructuresandhavealimitedabilitytopayformedicines,”hesays.

Forexample,inChinamostofthecompany’sbusinesscurrentlycomes from hospitals in 200 of the largest cities of more than 1m people.Nearly900mpeopleliveoutsidethesecitiesandtheChinesegovernmentisprovidingmajorinvestmenttoimprovehealthcareinthesecommunities.“Wewanttobepartofthisbroadermarketandbuildasustainablebusinessinservingthosepeople,”hesays.

Inordertodoso,thecompanyisworkingwiththeChinaHealthPromotionFoundationandtheMinistryofHealthtoimprovecommunityhealthcarebystrengtheningthetrainingofitsgeneralpractitioners.Itisalsosponsoringathree-yearprogrammethatwilltrain30,000doctorssotheycanbettertreatsomecommonchronicdiseases.

Reachingouttounderservedsegmentsofthepopulationisperhapsnotonlyamoralimperativeforsomepharmaceuticalfirms,butcanalsoprovestrategicallyastute,astheyseektoimprovetieswithgovernmentsandregulatorsintheregion,andgrowtheoverallmarket.

Withinamonthoftheacquisition,theUSFoodandDrugAdministrationbannedtheimportof30ofRanbaxy’sgenericdrugsformanufacturingviolationsandalsoaccusedRanbaxyofsellingmisbrandedpharmaceuticals.ThecompanyhassubsequentlyexperienceddelaysingettingregulatoryapprovaltosellotherdrugsintheUS.TheUSJusticeDepartmenthassincefiledaproposedsettlementwithRanbaxy,andthecompanyhassetasideUS$500mforliabilitiesconnectedtotheinquiry.Allthispointstothefactthattherearerisksinvolvedwithmergersandacquisitionsinanindustrywithvaryingnationalregulations,andqualityandsafetystandards.

© The Economist Intelligence Unit Limited 201218

Asia Competition Barometer:Pharmaceuticals

Case study: Lonza

Lonza: Focus on qualityLonza,aSwisschemicalsandbiotechnologyfirmwhoseproducts

feedintothepharmaceutical,healthcareandlifesciencesindustries,builtitsfirstAsianplantinChina15yearsago.Sincethen,thefirm’sproductionandR&Dnetworkintheregionhasgrownconsistently,saysMichaelBrown,vicepresidentofoperationsatLonzaBiologicsinSingapore.Overthelasttenyears,LonzahasinvestedaboutCHF1bn(US$1.1bn)inAsia.Some1,400ofits11,000-strongglobalworkforcearebasedintheregiontoday.Asiacontributes14%ofLonza’soverallrevenuesandthisisexpectedtoriseto20%by2015.

Foritschemicalmanufacturingbusiness,Asiarepresents“asignificantplatformofgrowthforitsexistingandnichetechnologies,”MrBrownsays.Butintermsofthemarketfornewbiologics,asidefromJapan—oneofthesevenbiggestmarketsworldwide—demandinAsiaisrelativelysmall.“However,domesticAsianmarkets,especiallyChina,arefuturegrowthopportunitiesfornewmedicalentities(NMEs),andalsobiosimilarsandgenerics,”headds.

MrBrownsaysthatcompetitioninAsiahasincreasedinthesmallmoleculessegmentofthecustommanufacturingbusiness.“However,thenumberofnewcompetitorsissomewhatlimitedconsideringthattheproductswemanufactureareallheavilyregulatedandrequirecomplexmanufacturingtechnologies,”hesays.“Inareaslikepeptides,

conjugatedantibodies,cytotoxicswedonotseemuchcompetitionoutofAsia.”Similarly,thefirmhasfewcompetitorsinthebiologicalcustommanufacturingspace,whereMrBrownbelievestheAsiancompetitionis“stillonalearningcurve”.However,LonzadoesexpectincreasedcompetitionfromAsiancompetitorsinthelifescienceingredientsbusiness,whichsupportsnutraceuticals.

Meanwhile,MrBrownbelievesthatrisingincomesintheregionareslowlyerodingthelabourcostadvantagesthatsomeAsiancompetitorscurrentlyenjoy.Additionally,Asiangovernmentsarealsoraisingtheirenvironmentalprotectionandqualitystandards.This“increasingrigidnesscomingfromregulatoryauthoritieswillforceAsiancompetitorstoobeystrictrules,”hesays,henceraisingtheircostofcompliance.HeexpectsAsiancompetitorstoinvestheavilytoupgradetheirfacilities,furtherreducinganypriceadvantagestheyenjoy.

Overthenextfiveyears,LonzaaimstogrowitsbiologicaldevelopmentservicesinAsiabycementingitsrelationshipswithtraditionalpharmaceuticalcompaniesandnewlocalcompaniesthatarecurrentlyexpandinginAsia.MrBrownbelievesthatthereareanincreasingnumberoffirmsdevelopingaclinicalfootprintacrosstheregion,andLonzaaimstosupporttheirpipelineswithitsproductsandservices.

© The Economist Intelligence Unit Limited 2012 19

Asia Competition Barometer:Pharmaceuticals

Outlook

ContinuedeconomicgrowthinAsiahasledtoincreasedhouseholdincomesandspendingonhealthcareandpharmaceuticals.“InAsia,clearlywe[intheindustry]arebenefittingfromthe

growingnumberofpeopleinitwhohavebetteraccesstohealthcareandarewillingandabletopayformedicines,”MrMallonatAstraZenecasays.Additionally,thedrivebygovernmentsintheregiontobroadenaccesswillalsoboostdemandforAsia’spharmaceuticalmarket.

RisingincomesandurbanisationinAsiahavealsoledtolifestylechangesthathaveraisedtheincidenceofdeveloped-worlddiseasesintheregion.Togetherwithlongerlifeexpectanciesandotherdemographicchanges,thesetrendsarerapidlybroadeningthehealthcareneedsoftheregion,drivingdemandforarangeofpharmaceuticalproducts.

Separately,asinmanyotherindustries,AsiahasalsograduallybecomeakeysourceofproductionandR&Dforthepharmaceuticalsector.Thistrendislikelytocontinue,owingprimarilytolowerproductioncostsandincreasinglysophisticatedR&Dcapabilities,bothunderpinnedbythehugetalentpoolsaroundtheregion.

Overthenextfewyears,theregion’sindustryislikelytobeshapedbytwoseparatebutrelatedcompetitivetrends.Firstisthecompetitionbetweengenericsmanufacturersandinnovativebigbrandfirms,particularlyasmanyblockbusterdrugpatentsexpire.Wearelikelytoseemanymoremergers,acquisitionsandotherpartnershipsbetweengenericsmanufacturersandbigbrandcompanies,astheyseektoexploitcomplementaryadvantages.Althoughthejuryisstilloutonthevaluethatmaybecreated—theDaiichi-SankyoandRanbaxydealprovidingsomecautionarylessons—thereisagoodchancethatthesector’sglobalchampionsofthefuturemaybetheproductsofpartnershipsinvolvingAsianfirms.

SecondisthetensionbetweensmallandlargeAsianfirms.Thesectorhaswitnessedsomeconsolidationinrecentyears,andthereisdoubtabouttheextenttowhichsmallfirmscancompetewithlargerfirmsthatenjoyscaleefficienciesandlowerdistributioncosts.Nevertheless,thereare

© The Economist Intelligence Unit Limited 201220

Asia Competition Barometer:Pharmaceuticals

certainnichesthatsmallfirmscancontinuetoexploit.Theymaynothavetheresourcestoinvestindrugdiscoveryanddevelopmentbutmanyofthemhaveenjoyedsuccessaslow-costgenericproducers.Overthelasttwodecades,hundredsofnewpharmaceuticalcompaniesbeganoperationsinordertothemeettheboomingdemandforgenericdrugs,specialtydrugsandbiotech-basedproducts.

Furthermore,withincreasedcostpressuresinWesternmarkets,AsiahasbecomeanimportanthubforCMOsandCROs.AsianCMOsareaccountingforagrowingshareofglobalpharmaceuticalproductionandasaresultofincreasingdemandforpharmaceuticalproductsintheregion,smallerAsianpharmaceuticalcompaniescanexpecttocontinuebenefittingfromtheoutsourcingofmanufacturingaswellasresearch.18

GivenAsia’srapidgrowth,andtheconfluenceofthesedifferentpharmaceuticalsectorbusinessmodelsintheregion,theregioniswellpoisedtoproducemanyoftheworld’smostcompetitiveandinnovativepharmaceuticalfirmsofthefuture.

18“Thechangingdynamics of pharma outsourcinginAsia:Areyoureadjustingyoursights?”,PricewaterhouseCoopers,2008

© The Economist Intelligence Unit Limited 2012 21

Asia Competition Barometer:Pharmaceuticals

Barometer methodology

Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometer.Drawinguponcompany-

leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.

Assessingauniverseofover350publicly-listedpharmaceuticalcompaniesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapeforthePharmaceuticalsector.

How do we define the pharmaceutical sector? Thepharmaceuticalsectorincludesthefollowing:manufactureofbasicpharmaceuticalproductsandpreparations,andthewholesaleofpharmaceuticalgoods.

Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.

Profitability IndexToassesstheaggregateprofitabilityofthepharmaceuticalsectorinAsia,theEconomistIntelligenceUnitdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:

• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDAexcludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.

• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasuresthe

© The Economist Intelligence Unit Limited 201222

Asia Competition Barometer:Pharmaceuticals

profitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.

• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.

• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.

• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.

Weaggregatedcompany-leveldatafor350publicly-quotedpharmaceuticalcompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).

Market concentration Profitability indicator Weight in Profitability Index

EBITDAmargin(%) 35%

Grossmargin(%) 35%

Returnoncapitalemployed(%) 10%

Returnonequity(%) 10%

Returnonassets(%) 10%

© The Economist Intelligence Unit Limited 2012 23

Asia Competition Barometer:Pharmaceuticals

Toassessmarketconcentration,theEconomistIntelligenceUnitcalculatedtheHerfindahl-HirschmannIndex(HHI)forthePharmaceuticalsectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseofover350listedcompaniesassessed.19HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toamonopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.

19Orsummedforallthefirmsin the case that there are fewerthan50.

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out herein.