BMI Core View: Emerging markets will drive industry growth. The importance of emerging markets to large multinational drugmakers cannot be overstated. BMI's Pharmaceutical Expenditure Model reveals that five-year compound annual growth rates (CAGRs) in traditional markets, such as the US, Western Europe and Japan, are either in low-single, or in some cases negative, figures. Meanwhile, the US dollar five-year CAGRs for the main emerging markets - Brazil, Russia, India and China - are expected to post high-single figure or double-digit increases.
According to local media, a new entity consisting of 23 companies that support the overseas marketing of medical devices, pharmaceutical products and medical services will be launched, named Medical Excellence Japan (MEJ). In particular, the government is planning to export Japanese healthcare services to emerging nations, with a focus on South East Asia. The current MEJ (established in 2011) was set up to promote medical tourism in Japan.
The country's intention to move away from the domestic market is unsurprising. Due to its biennial price cuts as well as having the characteristics of a developed market, the Japanese pharmaceutical market's growth potential is low. In 2013, we expect the market to grow by 4.9% from JPY10,358bn (US$131.1bn) in 2012 to JPY10,863bn (US$144.8bn). Over the decade (2012-2022), we forecast a low local compound annual growth rate of 2.1% (1.4% in US dollar terms).
Meanwhile, healthcare expenditure will see a low local CAGR of 2.2% (1.6% in US dollars) through to 2022. Although opportunities from the ageing population do exist, we highlight that the government has been shouldering much of the financial burden of eldercare, despite the slowing economy. Latest data from the World Health Organization show that the government health expenditure reached JPY34,730.8bn (US$436bn) in 2011. However this was a 2.8% contraction from the JPY35,733bn (US$407bn) spent by the government in 2010.
|Low Growth Potential|
|Japan Pharmaceutical & Healthcare Forecast (JPYbn)|
In addition to low growth in the pharmaceutical and healthcare sectors, latest data from the UN Commodities Trade Database show that not only is the country highly reliant on pharmaceutical imports, pharmaceutical exports have been facing a contraction since their peak in 2009. In 2012, overall pharmaceutical exports contracted by 13.5% from JPY267.4bn (US$3.4bn) in 2011 to JPY231.4bn (US$2.9bn) in 2012. At the same time, the country imported more pharmaceuticals, valued at JPY1,749bn (US$22.1bn) in 2012 which was a 14.8% increase from JPY1,524bn (US$19.1bn) in 2011.
|Reliance On Imports|
|Japan Pharmaceutical Exports (LHS) & Imports (RHS)|
In contrast, emerging economies represent strong growth opportunities. This is partly due to the historic lack of access to healthcare services (due to poor infrastructure or inability to afford healthcare services), and the opening up of these economies, as well as the government's willingness to spend more on healthcare provision. It is our view that Asia Pacific will remain a highly attractive prospect for pharmaceutical and healthcare providers. Data released by the WHO show that in 2011, developed Asia Pacific countries (Japan, Singapore, New Zealand, South Korea and Australia) saw a slowdown in overall health expenditure growth from 19.3% in 2010 to 12.9% in 2011 in US dollar terms. Meanwhile, the figures for developing countries were 15.5% in 2010 and 13.0% in 2011. BMI highlights that this was due to a decline in Malaysian health expenditure in 2011. If we exclude Malaysia, average health expenditure growth reached 15.2% in 2011.
However, a key downside risk is Japan's late entrance to the emerging economies . In comparison with other multinational pharmaceutical companies, Japanese companies have generally been slow to capture growth potential in emerging markets. The setup of the MEJ, while positive, may be challenged by regional players. For example, Malaysia's healthcare firms, such as IHH Healthcare, Sime Darby and KPJ Healthcare, are also looking to expand their footprints in neighbouring Indonesia.