Three out of four pharmaceutical companies believe their industry is in the midst of a strategic crisis, new research finds. Pricing and cost pressures, regulatory changes and patent expiries are leading to shrinking margins, and the biggest growth opportunities are to be found in the emerging markets, albeit with smaller margins, says the report, from Roland Berger Strategy Consultants.

Emerging markets are expected to account for almost 40% of would market share by 2016, and 51% of drugmakers surveyed for the study say they are already planning to relocate their sales departments to these regions. 44% also said they would relocate their administration and 43% their R&D to emerging markets.

Although the top 10 pharmaceutical companies increased their sales by about 13% during 2009-10, their earnings before interest and tax (EBIT) margins dropped almost 4%, equal to a profit loss of 34 billion euros, largely due to developments in the mature markets.

"Pharmaceutical markets such as Europe and the US are stagnating due to rising price pressure, regulatory changes in the healthcare system and more stringent admission requirements, but in emerging markets we are seeing strong growth. Nevertheless, the margins here are lower and driven heavily by non-patent-protected products," says Roland Berger consultant Martin Erharter.

Also, while R&D costs have risen over 80% worldwide in the past 10 years, the number of new product launches has dropped 43%; as a result, almost half the companies surveyed believe the return on investment (ROI) in R&D is more or less negative. Greater efficiency in research and more collaboration with third-party providers will become increasingly important, the study says.

It also suggests that focusing on high-growth emerging markets could provide a way out of this situation; while the global pharmaceuticals market will grow around 4.5% a year on average to 2016, growth in emerging markets will average almost 12% annually, with Brazil, China, India and Russia in particular experiencing above-average growth.

"The rising purchasing power in these regions, the growing middle class and better healthcare systems are driving the demand for medication," says Moris Hosseini, a partner at Roland Berger and co-author of the study.

"Therefore, it comes as no surprise that many pharmaceutical companies are increasingly focusing on emerging markets to better leverage the considerable growth potential in these regions," he adds.

However, the study also says there is no such thing as a generally valid strategy, and companies must think and plan strategically in various dimensions. It identifies four possible strategic approaches that can help the industry position itself optimally in various markets with a diverse range of solutions.

The first approach relates to new products in mature markets. In the past, marketing and sales activities were key for achieving lasting sales growth through innovative solutions. However, more restrictive healthcare policies in many countries and the rising demands of patients are now forcing pharmaceutical companies to focus on developing innovative products that add considerable value for patients. The opinion of experts from the clinical sector plus medical affairs operations are crucial to a product's success, it says.

The next approach deals with established products in mature markets. Fierce competition and considerable customer price-sensitivity in this segment means drugmakers must manufacture in a cost-efficient way to remain profitable. To do so, they can completely outsource certain functions or relocate them to low-cost countries. Firms that can offer high-quality products at reasonable prices will be successful, but this requires efficient administration, marketing and sales models.

Thirdly, the report looks at new products in emerging markets. A growing middle class, improving healthcare and rising income levels in these regions are driving up demand, even for more expensive medications, and the development of new and innovative products provides considerable growth potential. However, successful market entry is only possible if products meet specific market conditions and patient requirements. To realise this, companies should conduct their medical affairs and R&D activities locally. Further, these companies need strong local sales organisations and to collaborate with regional companies in order to gain effective access to patients willing to pay higher prices.

Finally, it examines established products in emerging markets. Drugmakers can use these products to realise scale effects in new markets and enhance their reputation. However, they need to analyse precisely the requirements and competitive situation of the individual markets in advance; markets such as China are strongly affected by regional differences and require country-specific strategies. Generally speaking, companies need efficient production and sales initiatives to drive their sales and earnings; to do so, collaborating with local partners makes good business sense, it says.