Industry Trend Analysis - Merck KGaA Well Poised For Emerging Market Growth Following Continuous Investments - APR 2018


BMI View: Merck KGaA will continue to expand and diversify the company's commercial operations in China and the pharmaceutical company will maintain its commitment towards healthcare initiatives in the country. New regulatory pathways and improvements to the country's intellectual property protection environment will work to ease the commercialisation bottlenecks, bolstering long term growth opportunities for drugmakers.

Merck KGaA's emerging market growth strategies will continue to expand and diversify the company's commercial operations. While Merck KGaA's group revenue is dominated by developed markets in Europe and North America, representing 31% (EUR4.7bn/USD5.7bn) and 25% (EUR3.8bn/USD4.6bn) respectively of net sales in 2017, we expect the emphasis on emerging markets to increase.

In 2017, organic sales growth at Merck KGaA was largely attributable to the Asia Pacific region, with growth mainly being driven by China and India. Asia Pacific accounted for approximately 60% of group-wide growth with the healthcare and life sciences business sectors contributing positively to the organic sales growth. As such, the drugmaker continues to roll out a host of healthcare projects in key emerging markets such as China. According to Stefan Oschmann, the CEO and chairman at Merck KGaA, 'From a regional perspective, in view of the importance of the Chinese market and China's ambitious plan to become a global leader in innovation and technology, we are placing further importance on bolstering our positioning in this country.'

China: Merck KGaA Investment Will Support Innovation In The Healthcare Sector

China's pharmaceutical sector will remain a key destination for foreign direct investment and pharmaceutical firms will continue to build their manufacturing presence in the country, aligning themselves with the government's push to develop the biomedical sector. Access to skills and knowledge, improvements in intellectual property protection and government-led progressive healthcare reforms have contributed to making the country popular for the discovery and production of pharmaceuticals ( see '2018 To See Continued Reform Of Pharmaceutical Regulatory Environment' March 7 2018). Moreover, the Chinese government is in the process of establishing a number of progressive healthcare reforms as part of its drive for innovation, with the pharmaceutical sector being a key component (highlighted in China's 13th Five-Year Plan). The development of a 'Healthy China' is central to the Chinese government's agenda for health and development and the country's president, Xi Jinping has put healthcare at the centre of China's policy-making endeavour, thus representing a number of opportunities for multinational pharmaceutical firms. Accentuating this view, industry experts state that, 'China has an ambitious plan to become a global leader in innovation and technology which could potentially bode well for multinational companies.'

Since entering China in 1933, Merck KGaA has established end-to-end R&D capabilities in the country, from discovery to clinical development and manufacturing of innovative medicines. Its comprehensive presence includes manufacturing sites in Shanghai, Beijing and Nantong. China continues to lead pharmaceutical sales in the emerging markets for Merck KGaA and the multinational drugmaker's product portfolio is well suited to benefit from the growing demand for diabetes and cardiovascular products, with further support provided by efforts to boost disease awareness and education among healthcare professionals.

MERCK KGAA SHOWCASES ITS LONG-TERM COMMITMENT TO DRIVING INNOVATION IN CHINA
Year Overview
Source: BMI
2018

Merck KGaA announced its plans of building a single-use manufacturing operation in Wuxi to target the biosimilars market.

2017

Merck KGaA opened its first BioReliance End-to-End Biodevelopment Centre in Shanghai with the goal of accelerating clinical development from molecule to commercial production.

2017

Merck KGaA opened its new application laboratory in China for the Performance Materials business sector to deliver comprehensive, customised services for its quality products and to seek and foster creative collaboration with customers for new applications and formulations.

2016

Merck KGaA inaugurated its EUR170mn (USD209.2mn) Nantong pharmaceutical plant, dedicated to producing high-quality pharmaceuticals on China's Essential Drug List. The drugmaker also announced a further investment of around EUR80mn (USD98.4mn) in a Life Science Centre near the Nantong pharmaceutical plant to manufacture high-purity inorganic salts, cell culture media products as well as ready-to-use media.

Drugmaker Activity Will Support Pharmaceutical Sales

It has been our view that China will remain an attractive destination for pharmaceutical investment by multinational drugmakers, and we expect that improved government commitment to the sector's development along with an already well-established manufacturing industry for medicines will ensure it remains a key target over the long term. Reflecting this positive outlook, the vast majority of major multinational pharmaceutical firms, including Novartis, AstraZeneca and Sanofi reported positive sales growth in Q417. Given the bright outlook for medicine sales and the substantial potential for growth in the market, these firms will remain committed and will seek to expand their presence. For instance, China continues to be a key market for AstraZeneca. Sales in the country in Q417 increased by 30% in constant exchange rate (CER) terms to USD813mn, representing 15% of emerging market sales, supported by new products and new launches of Forxiga (dapagliflozin) and Tagrisso (osimertinib), as well as due to the strong performance of Brilinta (ticagrelor). For full year 2017, Novo Nordisk's sales in China increased by 7% y-o-y, owing to the expansion of market share of its modern insulin products which were partially offset by declining human insulin sales.

Attractive Market For Multinational Drugmakers
China: Pharmaceutical Sales (CNYbn)
f = BMI forecast. Source: National Bureau Of Statistics of China, BMI

We are forecasting pharmaceutical sales in China to rise from CNY948.2bn (USD139.8bn) in 2017 to CNY2,174.8bn (USD332.0bn) by 2027, at a compound annual growth rate of 8.6% in local currency terms and 9.0% in US dollar terms.