The Perfect Prescription for Emerging Markets: Branded Generics

In the developed world, rising healthcare costs remain a major concern. In the US, healthcare spending has outpaced income growth for almost two decades, and it’s projected to grow by 57 percent over the next decade. Over that same period, gross domestic product (GDP) is expected to grow by only 38 percent.

In the emerging markets, healthcare spending is on a similar trajectory, boosted by new demand from a burgeoning middle class.

For example, the emerging markets are well represented among the estimated 350 million people suffering from diabetes around the world. While diabetes is generally thought of as a developed-world disease given its link to obesity, the BRIC nations (Brazil, Russia, India and China) rank in the top five in terms of the absolute number of diabetes sufferers.

According to data from the International Diabetes Foundation, India and China are first and second on the list of countries with the most diabetics. They’re followed by the US, which ranks third with an estimated 26.8 million diabetes patients. Russia and Brazil are fourth and fifth, with 9.6 million and 7.6 million patients, respectively.

As India enjoys the fruits of rapid economic development, type 2 diabetes has become a raging epidemic, currently afflicting 50.8 million people, or roughly 7 percent of the population. In fact, India now has more diabetics than any nation in the world. The disease is expected to kill about 1 million Indians annually for at least the next decade.

In China, while the absolute number of diabetics is smaller at 43.1 million, the situation is even grimmer. A recent study by researchers from the University of North Carolina found that Chinese teenagers develop diabetes at a rate nearly four times that of American teenagers. If that trend continues, China’s diabetes epidemic will be the world’s worst in about 20 years. As a result of the young ages at which the disease is being diagnosed, it would cost the country exponentially more than India’s battle and potentially put a sharp dent in productivity.

And the diabetes epidemic even reaches beyond the emerging markets to the so-called frontier markets, with 51.7 million people expected to be diagnosed with the disease in the Middle East and North Africa by 2030.

Diabetes isn’t the only disease that’s becoming increasingly common in the developing world. Income growth has driven increased consumption of tobacco products and alcohol, raising the incidence of lung cancer, cardiovascular illness and liver disease.

As life expectancies lengthen, age-related ailments such as dementia are on the rise as well. In Chile, for instance, it’s estimated that 19.6 people per 100,000 die of Alzheimer’s disease each year. That’s the eighth-highest death rate from the disease in the world. In Brazil, the rate runs at 8.2 people per 100,000. Meanwhile, Sub-Saharan Africa is experiencing similar such rates.

Chinese healthcare spending is forecast to jump 167 percent over the next decade, compared to GDP growth of 115 percent over the same period. In India, while GDP is expected to double, healthcare spending should rise by 140 percent.

So the health problems ravaging the emerging markets aren’t polio, small pox or other diseases one might assume would plague the developing world. In fact, they’re surprisingly similar to our own.

Pharmaceuticals will likely account for the lion’s share of increased emerging market healthcare spending, with drug sales expected to reach USD550 billion annually by 2020. That equates to about 70 percent of global drug sales, with China becoming the fastest-growing pharmaceutical market in the world.

All in a Name

In the emerging markets, health insurance is still a mostly foreign concept, available only to the wealthy, if it’s even available at all. So most patients pay for medications out of their own pockets and as a result are extremely sensitive to cost. But like consumers everywhere, they want to know that they’re getting the best possible product for their money.

Given that tendency, branded generic drugs have become a booming business.

A generic drug is simply one that is the bioequivalent of a branded original. For instance, Wellbutrin, which is made by GlaxoSmithKline (NYSE: GSK), is a commonly used antidepressant thanks to its efficacy in treating a number of depressive and anxiety disorders while having a low incidence of sexual side effects. But the patent granted on the drug in 1974 has long since expired, and now, if you’re given a prescription for Wellbutrin, you can ask your pharmacist to fill it with its cheaper generic version, bupropion.

But the chemical names by which generic drugs are often known can be difficult for patients to remember, much less pronounce. And to many consumers the term “generic” implies an inferior product, rather than the same drug at a lower price.

Many drug manufacturers have worked to combat that perception by offering what are known as “branded generics.” Essentially a marketing ploy, they’re exactly what the name implies: an off-patent drug marketed under a brand name.

That brand differentiates them from all the other generic versions of a drug already on the market, and they benefit from having a recognizable name. They’re also often manufactured by pharmaceutical companies that are already well known in the local market. That makes them much more popular with consumers.

Countries that are beginning to organize some semblance of a national healthcare system are also quite fond of branded generics. For instance, as China has worked toward developing its own healthcare system, it’s leaned heavily on branded generics due to their low cost and widespread acceptance by consumers. Cost control is a major issue for emerging healthcare systems, given the relatively lower incomes in these countries, smaller governmental budgets, and the sheer size and scope of the systems themselves.

Dr. Reddy’s Laboratories (NYSE: RDY) has become one of the biggest players in this space, offering more than 200 branded generic drugs in the areas of cardiovascular disease, pain management and oncology, among others. In fact, it has become one of the largest makers of branded generics in the world, which has helped propel its earnings growth to a 20 percent annual compounded rate over the past decade.

While the company’s products are becoming increasingly popular in the US, where it offers generic versions of drugs such as Plavix and Lipitor, the bulk of its sales are in emerging markets. That makes sense since it’s based in India and is familiar with the local business landscape.

The fact that it’s domiciled in India also enables it to manufacture its products at an extraordinarily low cost, with margins that are the stuff of Western drugmakers’ dreams. Its gross margin typically runs at around 50 percent.

The company also invests heavily in research and development, typically sinking between 6 percent and 7 percent of its revenues into its efforts. But it doesn’t limit itself to just taking advantage of patent expirations; it’s increasingly working in areas where there is little existing competition, as well as developing more complex molecules. That work is paying off in terms of drugs submitted for regulatory approval, with 63 pending applications with the US Food and Drug Administration alone.

Dr. Reddy’s is also pushing its geographic reach, working to increase its presence in fast-growing markets such as China by expanding its sales force and working with local regulators to help smooth the approval process.

With its superior understanding of local needs and processes, Dr. Reddy’s is well positioned to dominate the branded generic space in the emerging markets.

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