Emerging Markets Drive Consumer Health Growth, Pose Challenges

Developing markets account for 50% of the global self-care product sales, but close to 100% of the sector’s growth, according to market research firm IMS Health. This picture will continue as OTC drugs and dietary supplements have a bigger health care role in developing countries than in developed markets.

Pharmaceutical firms face diverse challenges in emerging markets, where they increasingly look to drive growth as economic stagnation stifles consumer health care product sales in Europe and North America, according to market research firm IMS Health.

Developing markets account for 50% of global self-care product sales – including vitamins and dietary supplements as well as OTC drugs – but close to 100% of the sector’s growth, says Andy Tisman, IMS’ senior principal for consumer health. Contributing factors include expanding sales of traditional Chinese medicines in emerging markets and contractions in North America and Japan offsetting growth in other developed countries.

This trend will continue as OTC drugs and supplements play a bigger role in developing countries’ health care than in mature markets, Tisman said at the annual AESGP meeting in Lisbon, Portugal, on June 5. Self-care share of total pharma growth in the developed world is less than 10% annually, compared with around 20% in the developing world.

“It is much faster growing. We are a much more important part of health care in those emerging countries, and that picture is not going to change,” he said.

Multiple factors make this a near certainty. For example, in many emerging markets consumers pay hefty out-of-pocket costs for Rx products. Moreover, in many of these countries consumers can walk into a pharmacy and buy Rx products without prescriptions.

“This means that Rx and OTC are directly competing with each other in many categories,” Tisman said.

Innovation Crucial In Developed Markets

Of the 37 percentage points of growth IMS found in the self-care space in the past five years, 27 came from innovation – new products and line extensions.

But while innovation spurs growth in the developed and developing world, it is “critical” to drive any growth at all in Europe and North America, Tisman pointed out.

“It's very hard to get volume growth in these markets, so what growth there is, is from trading consumers up to newer products offering more benefits for which they will at least pay more money.”

By contrast, growth of the base business is not uncommon in emerging markets. As the economic situations in these countries develop, urbanization increases and the middle class grows, the increasing affluence plays a part in driving growth. “Still, innovation is really key,” Tisman said.

The big five self-care categories – cough and cold remedies, 7% growth; vitamin/mineral supplements, 4.5%; pain relief, 4.1%; digestive medicines, 4.7%; and skin care products, 4.7% – account for around three-quarters of global sales. However, in the “all other medicines category,” traditional Chinese medicine is growing.

IMS data show global self-care products’ year-over-year overall sales growth since 2007 has outstripped prescription drug sales in terms of respective values. In 2012, for instance, Rx grew by 2.6%, while the self-care sector managed 4.6%. The self-care share of total pharma also has steadily increased, from 10.5% in 2007 to 11.4% in 2013.

This trend likely will continue in 2013. Through March, this has “been a very good year … driven primarily by the cough and cold season,” Tisman said.

The same cannot be said for all the top 10 OTC manufacturers. In fact, in terms of year-over-year growth, only two of the 10 enjoyed growth above the global OTC market growth level of 6.8%. Reckitt Benckiser Group PLC reported 9.8% in consumer health care product sales growth and PGT Healthcare – a joint venture between Procter & Gamble Co. and Teva Pharmaceutical Industries Ltd. – reported 8.1% growth.

Tough Mature Markets

Overall, manufacturers are challenged to find significant growth opportunities in North America and Europe, Tisman said.

Self-care product sales growth is sluggish in mature markets – including North America, Western Europe and Japan. North America declined in 2012 and continued dipping during the 2013 first quarter, with only the cough and cold sector bucking the trend.

In this region, quality control problems and subsequent recalls at Johnson & Johnson and Novartis AG have emptied U.S. retail shelves of certain brands, Tisman said. However, there is little evidence those issues deter consumers from purchasing those products when they are available.

The U.S. OTC market, though, is not getting a boost from Rx-to-OTC switches. The switches of proton pump inhibitor Prevacid24HR (lansoprazole) in 2009 and antihistamine Allegra (fexofenadine) in 2011 have not driven substantial sales growth for either brand, Tisman said .

Merck & Co. Inc.’s Oxytrol For Women (oxybutynin transdermal system) first-in-class switch in the U.S. approved in January 2013, however, should generate stronger sales as IMS sees potential for OTC overactive bladder products, he added (Also see "Oxytrol For Women Gets OTC Green Light As Rare First-In-Class Switch" - Pink Sheet, 28 Jan, 2013.).

In Europe, though switches remain problematic, 2012 sales grew 6%, driven by the cough and cold sector – which grew more than 10%. France has returned to growth after some lean years: indications there are that consumers are embracing self-selection of health care products, with many brands being introduced there, and sales of pain relievers, still largely reimbursed, are growing strongly.

In Central and Eastern Europe performances vary greatly, with Russia continuing to drive most of the region’s growth and Poland following behind. Local players are growing, such as Pharmstandard in Russia and Polpharma SA in Poland.

But self-care firms are not prospering in Southern Europe. Italy – until recently a growth driver in Western Europe – was hit by a sudden slowdown in sales for non-registered products – products that are not registered medicines, but sold mainly through pharmacies and perceived by consumers as medicines, such as some supplements and herbal products. In fact, sales across all channels are sluggish, although non-pharmacy still outperforms pharmacy.

Greece and Spain also have been hit hard by economic conditions. Government policies in those countries focused on price cuts and cutbacks in the Rx sector have not sparked a rise in OTC sales, but are expected to benefit sales of generics in the longer term.

In terms of manufacturers PGT Healthcare has benefited from a heavy cough and cold season and Sanofi and German firm Stada Arzneimittel AG have also experienced growth, outstripping the European average of 5.7%. GlaxoSmithKline PLC is not impressing analysts at present, but its longer-term prospects look good (Also see "GSK Hones OTCs As “Sharp End” Of Consumer Products Business" - Pink Sheet, 24 Jun, 2013.).

Unstoppable TCM Growth

The story in the Asia Pacific region is complex and diverse. China clearly dominates and investors will have to manage diverse markets to take advantage of opportunities for growth, Tisman said.

India, Indonesia and Australia are also important growth contributors. Achieving scale in China and throughout the region, though, will be a major challenge in the face of large local competitors and different treatment paradigms, Tisman added.

Additionally, because of the significant role traditional Chinese medicines have in the area, the country’s self-care picture differs from the rest of the world – the “major five” categories register a smaller share of the market.

“The TCM market itself – if we look at the traditional manufacturers in this market – is becoming more like a modern, western pharmaceutical marketplace,” Tisman noted.

Increasingly, TCM products are available in gel capsule form and in blister packs, with professional branding. “Consumers may want the same traditional products, but they want them presented in a modern way,” Tisman said.

Given the scale of growth, leading western companies are jumping on the TCM bandwagon. Manufacturers such as Nestle SA, GSK and Reckitt Benckiser are making inroads either through partnerships or setting up their own research and development centers.

Locals Lead In Developing Countries

Markets in the Middle East and Africa draw interest from many firms, but present challenges. Growth in 2012 for the combined Central and Eastern Europe and Middle East and Africa region – so-called CEEMEA – was impressive, at 12.1%. Multinationals have enjoyed significant growth in the region, but competition from large local players is growing.

OTC firms see the Middle East and Africa as “almost the final frontier in the region,” Tisman said.

For example, South Africa’s self-care sector is buoyant, despite economic characteristics resembling Europe. Egypt, Algeria and Saudi Arabia are maintaining growth, with Jordan not far behind, but Morocco remains problematic. Local companies in Saudi Arabia are growing as the market expands.

“As this diverse group of markets continues to develop, manufacturers must invest in order to keep pace and to capitalize on growth opportunities,” Tisman warned.

Latin America is a tale of three countries for IMS: Mexico, Brazil and Venezuela. Brazil has restricted the sale of OTCs to behind the counter, but Tisman said this seems to have had little impact on growth, roughly 15% in the last year. Its market is characterized by strong local players. Hypermarcas and EMS between them account for more than 25% of sales in the country.

Mexico, a more liberal market like the U.S., is important in the region for its scale, but its low growth is proving to be a challenge, Tisman suggested.

Venezuela, meanwhile, experienced substantial growth of more than 30% in the last year and its three-year average growth exceeds 35%. The problem, though, is growth there largely is inflation-driven, despite a law introduced in 2011 aimed at curbing this.