The emerging markets are a key area of growth for the major pharmaceutical
companies. AstraZeneca was an early mover into these countries and
continues to grow rapidly throughout them. GlaxoSmithKline is now
following an aggressive strategy to establish a comparable position after
Andrew Witty made this a priority on becoming CEO in May 2008. We initiate
coverage with BUY recommendations on both companies.
! Strong pharmaceutical market growth in the emerging markets: At a time
when pharmaceutical market growth in the developed world is stagnating, there is
strong double digit growth across the emerging markets. China, the world’s ninth
largest pharmaceuticals market, is growing at c25% p.a. and is expected to
become the third largest by 2012.
! Diverse growth drivers in the emerging markets: The market expansion is
being driven by these countries’ strong economic growth, the rapid growth of their
emerging middle class, government health care spending growing ahead of GDP
growth (in BRIC countries; China, for example, is investing US$124bn over three
years to 2011), and changing disease patterns as the countries adopt Western
lifestyles (diabetes cases are expected to almost double in India to 74m by 2025).
! Extended product life cycles: The presence of branded pharmaceuticals in the
emerging markets means that products can maintain their sales after patents
expire, in the same way as OTC products in the developed world.
! Reduced risks: Intellectual property protection is being strengthened, and the
industry has adapted to the challenges of selling its products in markets with such
large disparities in wealth and to the political and reputational risks in these
countries.
! AstraZeneca: AstraZeneca was quick to recognise the importance of the
emerging markets, such that they now generate 14% of its revenues. It is one of
the leading companies across these regions and continues to gain market share.
Despite this, its shares trade on a significant discount to its global peers (7.9x vs
10.5x) which we believe is unjustified. We initiate with a BUY, target price 3040p.
! GlaxoSmithKline: Andrew Witty, CEO since May 2008, has made the emerging
markets a key priority and the company is investing heavily in this area. In the last
year three alliances have been entered into and two acquisitions made as the
company makes a step change in its approach to the emerging markets and
follows an aggressive growth strategy. We initiate with a BUY, target price 1290p.
 

Investment Appraisal: The Emerging Opportunity 3
Why are the emerging markets so attractive? 3
Rising levels of health spending 4
Strong economic growth 5
Significant private expenditure on healthcare 6
Prioritised government spending on healthcare 7
Changing lifestyles & diseases 7
Enhanced product life cycle 8
The challenges 9
Pricing 9
Intellectual property 10
Cultural and political matters 10
Reputation 11
Corporate perception 11
Overview of the emerging markets
Key emerging economies 14
Brazil 14
Russia 16
India 18
China 19
MENA 21
Conclusion 22
Companies
AstraZeneca 25
GlaxoSmithKline 35
Appendices 45