Scenario 1: The producers

Scenario One tells the story of how the absence of new drugs continues to cause mounting cost pressures. Efficiencies are sought in marketing, manufacturing and research. Former employees return to the emerging markets of India and China which see a growing concentration of manufacturing and marketing expertise, increased patient demand and government support for research initiatives. Investors see the potential for making money on volume. Western pharmaceutical companies are challenged to deepen existing relationships with emerging country firms. Southern governments become more powerful and successfully insist on technology transfer arrangements and favourable interpretation of IPR agreements. All these changes result in more competition and increased accountability in the global pharmaceuticals market. The story ends with a section on the implications of the Scenario for institutional investors, pharmaceutical companies and governments:

Implications of Scenario One: The Producers Scenario

Possible Implications for Institutional Investors:

  1. Investors accept that the traditional pharmaceutical industry will continue to under-perform as investments during the transition phase but also increase their efforts to identify new opportunities and products. Non-traditional sources of innovation become a new target for investment.
  2. All links in the investment chain (trustees, asset allocation advisers, fund managers and sell side analysts) place progressively greater emphasis on understanding the economics and logistics of commodity generic markets across different geographies and the ability of the pharmaceutical majors to partner effectively with emerging market producers.
  3. Investors actively provide incentives to pharmaceutical executives to make a smooth transition by re-structuring remuneration packages to focus less on maintaining EPS growth per se but rather on R&D productivity and appropriate partnerships. Investors also engage proactively with company boards on CEO succession planning to ensure senior management is “fit for purpose” given this new environment.
  4. Given that the Pharmaceutical Industry is reflective of wider economic and demographic changes, there is a change in the pattern of graduate hiring, with investors looking for graduates and former corporate managers with Chinese and Indian ethnic roots and linguistic skills.

Possible Implications for Governments:

  1. There is a progressive widening of regulatory influence from the Food and Drug Administration (FDA) to a tightly linked network of authorities.
  2. OECD Governments consciously frame the public debate as a dynamic tension between the need for cheaper healthcare and the economic benefits derived from a strong domestic pharmaceutical industry.
  3. Governments effectively re-negotiate global IPR agreements as a result of pressure from China and other generic producer/consumer nations.
  4. Availability of cheaper generic therapies creates headroom for spending to reward innovation and value added, and on expensive therapies. This puts pressure on all Governments to deliver on health, rather than reinvest the savings elsewhere. This has implications for health expenditure in overall budgets.
  5. Emerging Market Governments, encouraged by the early successes of these sectors, increase their support for the pharmaceutical sector in producer markets.
  6. OECD Governments come under pressure from pharmaceutical companies and non-governmental organisations (NGOs) to increase overseas aid budgets as the potential for access increases. Companies argue for some tying of aid to the products of those firms domiciled in donor countries.

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The structured, two-way communication enabled by PharmaFutures helps to improve levels of trust, understanding and a greater alignment of interest between investors and pharmaceutical executives.

Daniel Summerfield, USS