BeaconIdeas

Coming to a Russian Pharmacy near You

In the investment world, BRIC has become synonymous with growth and newly emerged markets. I restrict most of our investing to BIC, Brazil, India and China. We mostly leave Russia out. Political uncertainty, an economy with a high dependency on oil and old cold war bruises that are not entirely healed are just some of the reasons. I only once dipped the toe of our portfolio strategy into Russian waters in 2009. It is a fairly consistent winner in the mobile arena.

InPharm.com, a publication owned by John Wiley & Sons Ltd, has highlighted opportunities for large multinational pharmas in Russia. Seeking new markets in fast growing emerging markets is a specific attribute I seek in our investments.

Since the collapse of the Soviet Union in 1991, Russia’s population decline has declined by seven million.  Smoking, drinking and unhealthy diets and lifestyles are behind very high levels of cardiovascular diseases, cancers and respiratory disease are all major contributors to this. The level of HIV/AIDS infection is also high, with treatment levels low.

This all adds up to a very high death rate of 15 deaths per 1000 people per year, and a UN forecast says Russia’s population could decline by a further 11 million by 2025 unless radical measures are taken.

This grim picture sets up a multifaceted approach: helping a nation, the ability to offer emerging markets pricing until the country has the ability to shoulder costs as we do in the west, and establishing long-term business relationships.

Around 80% of Russia’s current medicines needs are met by imported drugs, but the Kremlin wants to see more supplies generated domestically, with a target in place to reach a 50-50 ration by 2020. The government is encouraging further construction of manufacturing facilities within Russia. Recently, Nycomed announced plans for building a plant in Russia by 2013 and Sanofi-Aventis has bought a majority stake in a leading insulin producer.

A time tested method to begin work in any new country is through government sponsored joint ventures. This insures compliance, regulatory support and supply chain access in this vastly untapped country. Sanofi-Aventis (NYSE: SNY) is already ahead of the game (and a recent investment of ours).

Sanofi-Aventis has agreed to participate in a Russian pilot project designed to attract and retain pharmaceutical manufacturing in the country and expand the overall pharmaceutical market. The French drugmaker said it would contribute to the Pharmpolis Project via its recently-opened insulin factory in Russia. Sanofi-Aventis signed the memorandum of understanding with Prominvest, a subsidiary of the state-owned corporation Rostekhnologii.

Other multinationals are establishing their own beachheads and setting up groups for joint ventures, marketing and supply chain management. Merck & Co (NYSE: MRK) has assigned a senior executive to emerging markets.

His remit will include the company's prescription, vaccines and biologics businesses and also a newly-created emerging markets group. This will focus on China, Asia Pacific, Latin America and Middle East/Africa/Eastern Europe, including Russia and Turkey.

Pfizer (NYSE: PFE) has not been left out of Russia or many other emerging markets.

It has expanded its presence in the generics market with deals that see it license 75 products from two Indian drug makers. The company has acquired rights to 15 injectable products from Claris Lifesciences as well as 60 products (55 pills and five injections) from Aurobindo Pharma. The new, expanded agreements with Aurobindo take in 70 emerging markets and Pfizer said it would commercialise the products in phases, "tailoring its approach for different regions".

"The expansion of our product portfolio from this deal provides a foundation for us to commercialise branded generics based on patient needs within specific regions," said Jean-Michel Halfon, president of Pfizer's emerging markets business unit.

The unit was set up this year and has identified six priority markets: China, India, Brazil, Russia, Turkey and Mexico.

The reporters at InPharm.com have taken in the whole picture from regulatory to business issues.

As with other emerging markets, the regulatory and pricing environment in Russia is a good deal more volatile than established markets. This is currently reflected in the unpredictable pricing of medicines in pharmacies, but the government hopes to impose order in April with the introduction of a new maximum sale price.

Manufacturers have to register or re-register by 1 March 2010 their maximum sale price for any essential medicines on the official list, which will set a maximum price and control wholesale margins.

As the BIC countries emerge, so Russia will follow. Big pharma will seek out new markets and pave the way for better care while expanding markets; enhancing shareholder value.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long SNY, MRK, and PFE.

I’m a Believer

I am not quoting the Monkey’s from the 1960s nor am I making a religious statement.  

I have to admit that I am consistently amazed by Apple Inc. (NasdaqGS: AAPL). In a discussion with one of my tech analysts, they questioned if the new device (soon to be announced) will have an option to be just wifi. If the new device is a Kindle killer and more, and not a phone at all, for many users it will not require hooks into Verizon Communications (NYSE: VZ) or AT&T (NYSE: T). She assures me I could purchase all the magazines, text books and apps I want just from wifi and not need a cell hook.

After reading the NY Times last week and learning that the iPhone and iTouch can download Grand Theft Auto it now rivals our Wii. I have also noticed how much less my kids use their DS since getting Apple upgrades (now to iTouch, living in NY, we will not get iPhones until the day they work with Verizon). Clearly, the Apple team has designed the Swiss army knife of hardware, pared with so many apps, for so many types of solutions and uses.

Gaming, music, video and movies, GPS and navigation, and even a card counting app that is banned from Las Vegas, along with thousands of other categories of apps are the new norm from AAPL’s app store. Soon, books and all print materials, even those not well formatted for the web will sing from the newest creation.

Steve, I am consistently impressed as a consumer. For the past year, I have also been impressed as an investor by Apple’s innovation and the numbers posted. Impressive numbers such as an operating margin that is smack between that of a hardware manufacturer (with zero debt) and a software producer, along with strong free cash flow and return on equity.

Earnings are coming soon and expectations are high. The stock is near its 52 week high and my investors have benefited. The numbers, not salesmanship will once again display the cold hard facts. I am waiting, and holding, hoping to be impressed yet again.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long AAPL, RIMM, VZ and T.

Second disclosure: Mr. Corn carries a Blackberry and iPod, and has used both Macs and PCs at home since the early 1990s.

China: Already the World’s Largest Vaccine Maker

The power editors over at Fierce direct me to an article about the vaccine market in China. It was originally published in China Daily and I read it on the English version of People’s Daily Online.

China's vaccine sector will grow 25 percent annually, according to a report from Zero2IPO, a Chinese venture-capital firm. In 2012, the size of the market will reach "8 billion yuan", the report said.

Attracted by the growing vaccine market, "investors from home and abroad will be piling into China", said Zheng Yufen, senior manager for healthcare at the investment banking division of Zero2IPO. China is the world's largest vaccine manufacturer, and most of the companies in the sector are privately owned.

With China already being the world's largest vaccine manufacturer, how do investors get in the game? China’s government “gets it” and is making strong, fast strides towards cleaner, greener manufacturing, processing and its general treatment of the environment. For the past 20 years this has not been the case with pollution running rampant in some areas. With a growing middle class and so many other factors, healthcare is becoming a major issue. It is believed that providing some western style social benefits is a key to maintaining the political status quo. Healthcare tops the list of benefits with each demographic segment of the population being so large and having varied needs. It also can be excellent business domestically and exports. Although strong management and technological innovation are not the norm today , with such a large population and growing educational system, innovation has tremendous potential.

The local vaccine market has enjoyed strong growth worldwide, but vaccine sales accounted for only less than 1 percent in the nation's healthcare industry, according to figures from CITIC Securities. "That number is comparatively low considering China's large population base," said Zheng. Ongoing healthcare reform is giving the vaccine sector a boost because the Chinese government is expected to spend 26 billion yuan on improving public healthcare services before the end of 2011.

Right now most of the firms are private, making venture capital the only way into the market.

 "The time is ripe for venture capital to take some action in the sector," said a venture capital industry insider surnamed Wang. During the past three years, Wang's firm has been in contact with five vaccine companies, but no deals have been signed yet. Several other venture capital companies also have the same idea. Last year, IDG established a healthcare team to study the industry for potential investment targets.

Nationwide, China has over 40 vaccine manufacturers. Other than State-owned companies like Shanghai-listed Tiantan Biological Products and US-listed Sinovac Biotech (NasdaqGM: SVA), many of China's vaccine makers are private and still small in size. "Money is their biggest concern when they plan to expand," said Zheng.

With a scarcity of public companies in which to invest, we can seek large existing public companies that have the vision to invest in these private companies to increase their own pipelines, manufacturing capabilities and perhaps even more important, to have a foot in the door of this massive market.

In 2009, a batch of international pharmaceutical firms entered the vaccine sector through mergers and acquisitions. In late 2009, Novartis International AG, the world's sixth largest pharmaceutical company said it agreed to acquire an 85-percent stake in a Zhejiang-based private vaccine producer.

And last year, GlaxoSmithKline (GSK), the world's leading vaccine producer wrapped up two deals in China to establish vaccine manufacturing joint ventures with two local firms committed to researching and developing vaccines in various categories.

Two names I would like to see enter this market are Pfizer Inc. (NYSE: PFE) and Merck & Co. (NYSE: MRK). MRK has seen its percent of profits grow from vaccines. Back in October of 2007 I first posted about vaccine’s contribution to both the top and bottom lines at Merck.

Time is not on the side of the established public companies. The public companies need to move swiftly or fair valuation may become cost prohibitive.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (PFE and (MRK).