Today, the global pharmaceutical industry is worth roughly $1 trillion. And when you look at the major players in this space -- Merck (NYSE: MRK), Bayer (OTC: BAYRY), Johnson & Johnson (NYSE: JNJ), and so on -- it's hard to imagine the industry growing at any sort of rate for investors to get excited about.
It's no secret that many of the companies I just mentioned are facing some challenges. Before I tell you more about the opportunity, it's important to understand what those challenges are.
Big Pharma seemed unstoppable until a few years ago -- when three trends began pushing the industry in a new direction.
The "patent cliff": Between 2012 and 2018, patent expirations are set to erase a whopping $148 billion in sales. When those patents expire, generic makers move in, undercut the brand name and eat up the profits.
Production of new drugs is costly: PricewaterhouseCoopers estimates that for every 30 drugs in pre-clinical trials, only one makes it to market. Each drug costs millions (and sometimes billions) of dollars to develop, meaning R&D divisions are colossal monetary sinkholes that only occasionally produce a billion-dollar gem.
Regulation is tightening: Between the Affordable Healthcare Act and tighter FDA controls on new drugs, the U.S. government is following a global trend to rein in health care costs -- including prescription drug prices.
In light of these trends, it stands to reason that the pharmaceutical industry will continue to struggle in the years to come. But that may not be the case.
Consider this: A PWC report estimates that by 2020, the global pharmaceutical industry will be generating an annual $1.6 trillion in sales. That's 60% growth in a few short years.
If these projections are correct, then it means rather than seeing an indefinite lean period, Big Pharma is set for a boom as this larger, more powerful growth trend plays out. And this spells opportunity for investors who look in the right places.
So, given the industry headwinds I just described, where will this growth come from?
The short answer: emerging markets.
But to succeed abroad, companies will need to tailor their approach to the needs of their customers in these newly tapped markets.
Needless to say, emerging-market economies -- in particular, the so-called BRIC nations (Brazil, Russia, India and China) -- are not the United States. The quality of these countries' medical infrastructure and supply chains varies widely -- to say nothing of their wildly diverse cultures, lifestyles and (occasionally corrupt) governments.
To make their name in these new markets, a handful of drugmakers -- Novartis (NYSE: NVS), GlaxoSmithKline (NYSE: GSK) and Bayer, to name a few -- are taking similar strategies of investing in infrastructure, hiring sales staff and are increasing access to hard-to-reach populations.
Predicting which of these pharmaceutical giants will dominate by 2020 and beyond is complicated, to say the very least. In fact, it might require a guru... so we're looking to one of our favorites: Warren Buffett.
At the end of this year's first quarter, Buffett owned nearly 4 million shares of French drugmaker Sanofi (NYSE: SNY), worth more than $200 million. Sanofi's foothold in emerging markets may be a big part of the reason for the Oracle's sizable stake.
Emerging markets account for a third of Sanofi's €33 billion (about $45 billion) in sales -- the largest portion of any market. These markets account for nearly half of sales for the company's consumer health care products, which include everything from cough medicine to tampons. Also, Sanofi is the self-proclaimed undisputed global leader in flu vaccines.
However, the company's shining star is its diabetes medications -- with more than 8 million patients worldwide and €6.6 billion in sales last year, an increase of nearly 20% from 2012. Russia hosts the company's second-largest insulin pen production site, and Sanofi is building infrastructure in India to fill and manufacture insulin for the local population. Sanofi is also already well-established in China.
Risks to Consider: First, this is a big trend that will take several years to play out. Do your own research, and don't follow a guru (even Buffett) just for the sake of it. They do make mistakes. Second, many variables could affect this industry in the next six years. Be on the lookout for new regulations, mergers and acquisitions, and major global health crises. Third, watch for a competitive alternative to Sanofi's diabetes medications -- Eli Lilly (NYSE: LLY), in particular, is looking to take some of Sanofi's market share in that segment.
Action to Take --> There is no guarantee that Sanofi or the other companies I mentioned will control these new markets. But as it stands, Buffett has confidence that Sanofi is one of the best ways for investors to benefit from the growth in the global pharmaceutical industry over the next few years. Sanofi pays a healthy 3.5% dividend yield and has increased dividends for 13 consecutive years, so investors can collect a generous and growing dividend while they wait for Sanofi to expand its presence in emerging markets.