EM Consumer Survey 2017

Transcription

1 Global Equity Research Major Pharmaceuticals The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts European Pharma Team Anubhav Aggarwal Leandro Bastos Vamil Divan, MD Antonio Gonzalez, CFA Ari Jahja Kennen MacKay, Ph.D Ella Nusantoro Chunky Shah Tobias Stingelin, CFA Iris Wang Alethia Young Bruno Zanotta EM Consumer Survey 2017 CONNECTIONS SERIES Slowing state access offset by growing interest in self-pay for brands in key markets In the 7th annual Credit Suisse Emerging Markets Consumer Survey over 16,000 respondents from eight emerging markets were asked about their local healthcare environments and spending habits. The survey has allowed us to track consumer trends since its inception in. EM has been a key driver of growth for multinational pharma companies. IMS Quintiles estimates that EM medicine spending has grown 1 annually since, almost double the reported growth rate of the developed markets. EM now represents an average of 2 of total Pharma sales for our global Major Pharma coverage universe. Access to state-funded healthcare decreases. Since our survey has shown a steady improvement in the reported access to state-funded healthcare in EM. However, this year we note a 5pp year-on-year decline in reported access to both state-funded healthcare and state-funded medicines in our EM universe. This was offset by a 14pp year-on-year increase in out-of-pocket spending on medicines. Young more willing to pay for international brands. Our survey explores consumer preferences for local and international pharma brands. This year, we find younger respondents are typically more willing to pay a premium for international brands. This is important as this group has a higher proportion of wealth in key EM geographies. Slowing growth outlook. Our analysis of EU Pharma sales growth in the EM shows that growth slowed in (Figure 1). IMS Quintiles forecasts a slowing of annual growth to 6-9% CAGR from 2017 to 2021 compared with 10.3% annual growth over the last five years. Exposure to emerging markets sales: Highest AstraZeneca (UP) and Sanofi (OP); lowest Roche (OP) and Bristol Myers Squibb (Neutral). Figure 1: Quarterly regional growth rates for global pharma Local currency yoy % change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q WW US EU Japan China EM Source: Company data, Credit Suisse research DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Executive Summary Historically strong growth, but expected to slow For the 2017 Credit Suisse Emerging Markets Consumer survey Nielsen engaged over 16,000 respondents in eight countries. Our analysis assesses key issues in the Emerging Markets (EM) including reported access to state-funded healthcare, out-of-pocket spending on medicines and respondents perceptions on local and international brands. Access to state-funded healthcare Reported access to state-funded healthcare in the EM Universe has improved since (48%) to (57%), although it is slightly down from (62%). Key changes in access to state-funded healthcare in were reported in Indonesia (+11pp), Mexico (-8pp), Brazil (-6pp) and China (-10pp). We attribute the improved access in Indonesia to the rollout of the country s universal healthcare programme. We believe the decline in access in Brazil and Mexico comes as a result of increased constraints on public spending due to difficult economic conditions. The reported decrease in China could be a result of perceived lower access due to increasing government cost sensitivity in healthcare. Access to state-funded medicines has grown from (24%) to (28%) in the EM Universe. However, access has decreased from (-5pp), broadly as a result of decreased access in Brazil and Mexico again reflecting budget constraints. Out-of-pocket spending The proportion of disposable income spent on healthcare as a whole has remained broadly flat from (3.4%) to (3.6%) but absolute out-of-pocket medicine spending has increased by 26pp since. Strong growth in spending was noted in China (+50pp), Brazil (+21pp) and India (+21pp) in purchasing power parity spend over this period. Increased spending in China has been generated primarily from the younger cohorts, which we believe stems from their higher relative income and willingness to spend money on premium products. Increased spending in Brazil has been generated across age cohorts, likely as a result of annual medicine price rises. Willingness to pay a premium for international medicine brands The willingness of our survey respondents to pay a premium for international medicines gives an indication of the potential opportunity for our pharmaceutical companies. While willingness to pay a premium for an international product has remained flat in the EM universe as a whole, there have been notable increases in individual markets including China, Brazil and Russia. Our analysis shows the willingness to pay premiums for international medicine brands shows correlations with three factors: Income: A positive correlation in willingness to pay a premium for an international brand and income was notable in most EM countries, except South Africa. We believe higher earners in South Africa may be unwilling to pay a premium due to their already very high expenditure on private healthcare. Respondents in Russia and China showed the strongest correlation of income and willingness to pay a premium for international brands, highlighting an increased will in respondents with greater purchasing power. Trust of local brands: As in previous years, our analysis has shown a close correlation between respondents willingness to pay a premium for an international product and their trust of local brands. Respondents from countries with more doubt in local medicine brands were generally more inclined to pay a premium for international brands. In addition to having the lowest access to state-funded medicines, respondents from India reported some of the lowest levels of confidence (35% doubt local brands) in local brands and most willingness to pay a premium for an international brand (44% EM Consumer Survey

3 willing to pay a premium). Respondents from Indonesia were most confident in local brands (16% doubt local brands) and least likely to pay a premium (23% willing to pay a premium) Access to state-funded medicines: Respondents from countries with greater reported access to state-funded medicines were generally less inclined to pay a premium for international brands. Respondents in India reported the least access to state-funded medication (1 had access) and the highest willingness to pay a premium for an international brand (44% willing). Conversely, in Brazil, reported access was one of the highest (5 access) and willingness to pay was lower (33% willing). Younger respondents more willing to pay a premium for international brands For the first time since the survey was launched, this year we have analyzed the willingness of different age demographics to pay a premium for international brands. Results from the survey show that more of the younger demographics were willing to pay a premium for international products in the key EMs. In Brazil, Mexico and China c2 more respondents from the youngest age demographic were willing to pay a premium for international brands. In Russia (c15%) and South Africa (c1) more of the younger respondents were also willing to pay a premium. In China and Russia, the youngest also reported the highest income. In China, the young typically show a high level of willingness to pay extra for a premium product or a discretional product. We believe this trend is a positive for international pharma and could reflect a longer-term change in local preferences. EM Consumer Survey

4 Introduction to Pharma in EM Strong growth in the major emerging markets in recent years In, the EM made up almost a quarter of the global medicines market in terms of spend (Figure 2; IMS Quintiles data). IMS reports 10.3% growth between and, whilst our analysis of a universe 12 international companies with EM sales of $63bn recorded 6.8% growth over the same period. The vast majority (c75%) of the total EM medicine spend occurred in the tier 1 (China) and tier 2 (Brazil, India and Russia) countries. Of these countries, China and Brazil are amongst the top 10 global spenders on medicines with China having occupied the number two spot since. China has experienced the highest level of growth in CAGR terms over the last five years at 12.4% CER. Average CER growth for EU pharma sales in China was in line with this at 11.6% although this fell to 6.4% in with supply issues. Tier 2 countries have also shown very high growth rates (CAGR c11.4%) since. The growth in spending is likely to have occurred as a result of GDP growth, improving healthcare infrastructure in the EM which subsequently facilitates access to medicines. These data align with findings from our survey which suggest an increase in access to healthcare and an increase in spending on medicines over the same period in our surveyed EM universe. Figure 2: Historic growth rates of Emerging Markets (-) Region USD Bn - CAGR (CER) Global 1, % Developed % US % Emerging % China % Tier % Brazil % India % Russia % Tier % RoW % Source: IMS Quintiles report Outlook for Global Medicines through 2021 Growth in overall healthcare spend in the EM is also noted from World Health Organisation (WHO) data. The WHO data show significant growth in purchasing power parity (PPP) spend since particularly for the tier 1 (+34pp) and tier 2 (+10pp) EM countries (Figure 3). EM Consumer Survey

5 Figure 3: EM Healthcare spend by different channels in constant purchasing power parity (PPP) 1,600 Healthcare spend constatnt (PPP) per capita 1,400 1,200 1, Brazil China India Indonesia Mexico Russia South Africa Turkey General government expenditure on health Private insurance Out of pocket expenditure Source: WHO data While the data in Figure 3 illustrate the absolute spending growth by different segments, it is important to understand the underlying spending trends. Figure 4 shows the healthcare expenditure trends in the EM countries by percentage share of spending (i.e. state-funded, private insurance and out-of-pocket spending). In China, there has been an increase in the proportion spent through private insurance. This is in line with market observations that private payers are starting to play a more important role with strong growth in commercial insurance premium revenue. In India, greater spending has originated from state funds since, reflecting a healthcare drive from the government. Out-of-pocket spending increased in Russia and Turkey over the same period; elsewhere, the proportion of spending from respective channels has remained flat. Figure 4: Proportion of healthcare spend by different channels % of total Healthcare spend % 27% 26% 26% 27% 28% 28% 27% 3% 3% 4% 5% 46% 45% 46% 47% 37% 37% 36% 35% % 69% 68% 66% 2% 2% 2% 2% 29% 29% 3 32% 54% 52% 53% 54% 3% 2% 2% 2% 43% 46% 45% 44% 45% 45% 44% 44% 44% 43% 46% 46% 4% 4% 4% 4% 2% 2% 2% 2% 51% 51% 52% 52% 7% 7% 7% 7% 44% 43% 44% 44% 54% 55% 52% 52% 49% 5 49% 49% 16% 17% 18% 19% 84% 83% 82% 81% Brazil China India Indonesia Mexico Russia South Africa Turkey General government expenditure on health Private insurance Out of pocket expenditure Source: WHO data EM Consumer Survey

6 Future growth projected to slow While the historic growth in medicines spend in the EMs is clearly a positive indicator for the pharmaceutical industry, it should be noted that IMS forecasts suggest a slowing in this growth trend in the future (Figure 5). China: IMS Quintiles expects growth in China to fall from the five-year historic doubledigit CAGR to single-digit CAGR to This is anticipated to occur, in part, as a result of state insurance coverage plateauing, having reached 95%. This is likely to result in slowing of incremental medicine volume growth. Slowing growth could be further compounded by a number of reforms brought into place which aim to curb state medicine spending. We believe that the increasing proportion of wealth with the younger age demographics combined with their willingness to pay more for premium products continue to highlight China as a significant market opportunity for international Pharma. Furthermore, we believe that additional growth could be stimulated by the refresh of the national reimbursed drugs list which occurred in February. Brazil: IMS Quintiles also forecasts a slowing of growth in Brazil. The Brazilian healthcare market has experienced significant economic pressure which has forced cuts to the healthcare budgets. We think that the decrease in reported access to state healthcare seen in this year s survey reflects these cuts. State expenditure and out-ofpocket spending on medicine may stall as the recession continues to bite. The Credit Suisse Brazil healthcare team also believes medicine price rises are also likely to slow from the current double-digit annual rates. IMS forecasts a 7-1 CAGR in the Brazilian medicine market until 2021 down from 11.4% over the previous five years. Turkey: A more positive growth story is expected in Turkey. Turkey introduced a universal healthcare coverage scheme in which has led to significant growth in medicine spending particularly through the government channel. This spending is expected to accelerate to double-digit CAGR in gross terms according to IMS forecasts, although this does not take into account rebates. Figure 5: Historic CAGR vs forecast CAGR for medicine sales in the EM countries 2 18% 16% Forecast CAGR ( ) 14% 12% 1 8% 6% 4% Poland Mexico Turkey Bangaldesh Pakistan India Egypt Saudi Arabia Brazil South Africa China Indonesia Russia 2% Blubble size: Market value $bn % 4% 6% 8% 1 12% 14% 16% 18% 2 Historic CAGR (-16) Source: IMS Quintiles report Outlook for Global Medicines through 2021 EM Consumer Survey

7 Company specific exposure to the EM Figure 6: Sales growth by region for global pharma Growth of the Emerging Markets has provided an excellent opportunity to pharmaceutical companies within our EU coverage universe. Our analysis shows that European Pharma (Sanofi, Novartis, GSK, AZN, Roche, Shire, Merck KGaA, Novo and Bayer) has benefited from the strong growth in the EM (Figure 6). Strong growth in EM sales has been noted since 2006, peaking at 25.5% growth YoY in Q1-. China drove a significant proportion of this growth (46.6% growth was noted in Q1-). In line with IMS forecasts of a slowdown in medicine sales growth, we have seen reported EM sales growth for EU pharma slow significantly over the last year. For full year, we saw growth of only 3.8% for our 12-company multi-national corporation universe which provides a sufficient breakdown of sales in order for us to assess the performance. FY China sales remain buoyant at 6.4%. Local currency yoy % change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q WW US EU Japan China EM Source: Company data, Credit Suisse research A slowdown in EM growth could be expected to impact AstraZeneca and Sanofi which have the highest exposure to these markets at 27% and 28% respectively (Figure 7). AstraZeneca has had a growing level of exposure to the EM since as sales of brands in the US and EU decline because of patent expiries. Roche has the lowest exposure of the European companies reflecting its focus on expensive oncology medicines. Figure 7: Regional revenue exposure of big pharma companies Regional exposure (%) AZN Bayer GSK Novartis Novo Sanofi Roche Abbvie BMY Lilly JNJ Merck Pfizer Source: Company data, Credit Suisse research Emerging markets US EU ROW While forecasts present a more cautious outlook in the EM space, we still believe that there are growth opportunities for pharma. Improving local healthcare infrastructure in EM Consumer Survey

8 Figure 8: Survey population specific markets and growing disposable income in key markets will provide some positives to international pharma companies within these markets. Countries included and sample sizes for 2017 survey A list of the questions asked is shown in the appendix. Sample size Sample size (7 for Number () /% with access to state healthcare Population Urban 3 healthcare (m) rural) question Brazil % 84% 72% 76% 65% 72% 73% China % 73% 7 68% 69% India % 38% 91% 16% 41% 28% 17% Indonesia % 41% 45% 43% 34% 4 34% Mexico % 72% 62% 68% Russia % 96% 96% 96% 95% 96% 92% South Africa % 63% 57% 62% 5 Turkey % 84% 84% 78% 86% 86% Total % 67% 74% 6 61% 61% 54% EM Consumer Survey

9 Question 1: Access to State-Funded Healthcare Strong increase in access since but dips compared with Since, we have asked EM respondents whether they have access to state-funded healthcare and services. This is an important question and should provide guidance on the relative access that patients have to pharmaceuticals in different geographies Up to, we had generally seen a positive trend in reported access over time (Figure 9). In this year's survey, we have observed a decline in reported access to statefunded healthcare in the EM universe (58% access) compared with (62% access). Overall improvement in access to state-funded healthcare was reported in Indonesia (+11pp), South Africa (+5pp) and Turkey (+4pp). However, these increases were more than offset by the declines in access reported in China (-10pp), Mexico (-8pp) and Brazil (-6pp). The survey results further highlighted the first decline in access to state-funded medicine for our EM universe as a whole since. Again, this was primarily driven by decreased access in Brazil, China and Mexico. We attribute the decrease in state-funded healthcare access in Brazil to decreased federal funding of the public healthcare system. In, federal funding for the healthcare system was reported to be at levels lower than those seen over a decade ago. This comes as a result of the Brazilian government running a significant fiscal deficit, resulting in global expenditure cuts. Brazil's Minister of Health has indicated that further potential cuts to the public healthcare programme are expected. Decreased access in Mexico likely attributable to budget cuts. The Mexican government has had to make cuts to the and 2017 budgets, in part driven by low oil prices over the past two years. Our analyst in Mexico has highlighted that the state-run social security institute (IMSS) is generally considered to be underresourced. As a result, Mexico's Ministry of Health currently has $350m of outstanding debt to drug manufacturers. Unexpected decline in reported access in China. The reported decrease in access to state-funded healthcare access in China was unexpected, given that our local analyst has noted continued expansion of state healthcare fund coverage. However, our analyst also notes the increased importance of commercial insurance companies, which have reported strong revenue growth. Given that the survey assesses theoretical access to state-funded healthcare, the reported decrease in access could be attributable to private healthcare users not reporting the availability of state-provided services. Additionally, the Chinese government has implemented a number of reforms aimed at decreasing hospital medicine costs, which may have affected perceived access. Universal health scheme promoting access to healthcare in Indonesia. The most dramatic increase in access to state-funded healthcare was reported by respondents in Indonesia. In our opinion, this likely reflects the ramping up of the country s compulsory national health insurance system (Jaminan Kesehatan Nasional). The programme aims to give all citizens more access to public health services. Our local analyst notes that the number of people enrolled in the universal healthcare system has increased significantly from ~122 million in to 167 million now, which is roughly in line with the increase observed in the survey. EM Consumer Survey

10 Figure 9: Access to state-funded healthcare, medicines, diagnostics and vaccines 10 9 % access to state funded service Brazil China India Indonesia Mexico Russia SAfrica Turkey Universe Healthcare Medicines Vaccines Diagnostic tests In Figure 10, we show the impact of a respondent s location (rural vs. urban) on reported access to state-funded healthcare. In this year's survey, access to healthcare reported in rural regions has generally started to converge with that in urban regions. In Indonesia, however, access to state-funded medicine has improved in urban regions compared with rural regions. This may suggest that Indonesia s universal healthcare coverage is being rolled out more effectively in urban regions. There continues to be a wide gap in access to medicine in China, with rural areas lacking access relative to urban areas. Figure 10: Access to state-funded healthcare in urban versus rural regions 10 % access to state funded service Brazil China India Indonesia Mexico Russia SAfrica Turkey Universe urban - healthcare urban - medicines urban - vaccines urban - diagnostic tests rural- healthcare rural- medicines rural- vaccines rural- diagnostic tests In addition to assessing the overall trends in access to state-funded healthcare for all respondents, we have examined whether patients of different ages have varying levels of access. Since, we have seen that the oldest respondents generally have slightly better access to state-funded healthcare (Figure 11 and Figure 12) and medicines. EM Consumer Survey

11 Figure 11: Access to state-funded healthcare indexed to age cohort Figure 12: Access to state-funded medicine indexed to age cohort Access to state funded healthcare indexed to avg yrs Age cohorts Access to state funded medicine indexed to avg yrs Age cohorts EM Universe EM Universe EM Universe EM Universe EM Universe EM Universe EM Universe EM Universe EM Consumer Survey

12 Question 2: Proportion of income spent on healthcare Spending on healthcare largely stable in We have seen little change in the proportion of disposable income spent on healthcare as a whole since. In this year's survey, respondents reported a slight (+0.4pp) increase in healthcare spending from, bringing the percentage of disposable income spent on healthcare in EM to 3.6% for (Figure 13). The monthly average spend on healthcare in absolute PPP terms rebounded to 70 PPP (up from 65 PPP for ), bucking a trend of decline since (Figure 14). The total average income decreased in from (-5pp), partially impacted by the removal of Saudi Arabia from the survey. Figure 13: Overall population-adjusted spending as a % of disposable income 3 % of dispsoable income spend 25% 2 15% 1 5% Housing + Public Utilities Food Entertainment Autos Healthcare Education HPC Savings Other Figure 14: Monthly average income PPP and monthly average PPP spend on healthcare for our EM universe 2, Monthly Average income PPP 2,000 1,500 1, Total income Healthcare Monthly spend on healthcare, PPP EM Consumer Survey

13 Examining the country-specific trends, an increase in the proportion of disposable income spent on healthcare was reported in four countries in (Figure 15). As the analysis is population-weighted, the large increase in out-of-pocket healthcare spending in China (1.2pp) would have had the largest impact. Modest increases in spending were also reported in Turkey, South Africa and Mexico. The largest decline was reported in Indonesia, decreasing from 3.1% to 2.2%. Figure 15: Percentage of income spent on healthcare by EM country % Income on healthcare (PPP adjusted) Brazil China India Indonesia Mexico Russia S Africa Turkey Universe % inc. on healthcare (adjusted) Figure 16 shows the reported income of respondents split by age group and indexed to the age cohort. Findings from are in line with those seen in previous years, with the oldest cohort (age 56-65) having consistently reported the lowest incomes (Figure 17) in EM-average terms. In the EMs we typically see a higher concentration of wealth in younger generations due to higher levels of education and the emergence of more skilled jobs. As age increases, healthcare spending would also be expected to increase to cover the cost of age-related illnesses. In the US, this has proven to be the case (Figure 18 and Figure 19). However, in the EM universe, relatively lower healthcare spend has been reported by the older patient cohorts for. This likely reflects the decreased affordability of healthcare for lower-earning, older respondents. The data for China demonstrate this clearly, with significantly lower spending on healthcare among the older cohorts. This data set may also be skewed by a significantly higher spending among wealthier young respondents noted later (see Figure 22). This trend could also reflect the higher access to state-provided medicines reported for older respondents (Figure 18). EM Consumer Survey

14 Figure 16: Income indexed to yr age cohort for 2.5 Figure 17: Income indexed to yr age cohort since 1.5 Income indexed to Avg yr Income indexed to Avg 18-29yr Age Cohorts Brazil India EM Universe Average China Russia US Census Age Cohorts EM universe EM universe EM universe EM universe EM universe EM universe Figure 18: Healthcare spend indexed to yr age cohort for Healthcare spend indexed to Avg yr Brazil India EM universe Age Cohorts China Russia US Census Figure 19: Healthcare spend indexed to yr age cohort since Healthcare spend indexed to Avg 18-29yr Age Cohorts EM universe EM universe EM universe EM universe EM universe EM universe US Census EM Consumer Survey

15 Increased out-of-pocket spending on medicines in our EM universe driven by growth in China While out-of-pocket spending on healthcare as a whole has remained fairly stable, there has been a notable increase in out-of-pocket spending on medicines. Since, reported spending on medicines in our EM universe has increased by 27% in PPP terms. Significant growth has been reported in China (+50pp), Brazil (+23pp), India (+21pp) and Indonesia (+21pp). The reported increase in spending is supported by IMS data, which show 6.6% annual volume growth in medicines used in emerging markets since. This growth is attributable to improvements in emerging market economies, leading to improved spending on the provision of healthcare and higher disposable incomes. In, the EM monthly average spend on medicines grew by ~13% from (Figure 20). This was driven primarily by a significant increase in reported spending on medicines in China over the period (+30pp). In the other EM countries, spending on medicines largely remained flat year on year. Figure 20: Average monthly spend on medicines increasing in EM universe % households who reguarly purchase medicines Avg spend USD/PPP Brazil China India Indonesia Mexico Russia S Africa Turkey Universe % households buying medicines at least once a month Average Monthly Spend USD (medicines) Average Monthly Spend PPP (medicines) Younger people driving growth in medicine spending in China Further examination of medicine spending trends in China (Figure 21) reveals that younger people have been the prime driver of out-of-pocket medicine spending growth since (18-45yrs: +53pp vs 46-65yrs: +39pp). This likely reflects the fact that younger respondents have higher proportional incomes and therefore greater purchasing power. According to our local analyst younger people in China also tend to be more willing to pay a premium for high-quality products, so we think this may reflect higher spending on more costly products. In Brazil, spending on medicines has increased more evenly across the older (+24pp) and younger age cohorts (+25pp) since (Figure 22). While general healthcare can be obtained from the Brazilian Unified Health System (SUS), the vast majority of medicines are paid for out of pocket (c75%). We believe the uniform increase in spending on medicines across age cohorts reflects price increases for medicines in Brazil. Our team in EM Consumer Survey

16 Brazil has reported annual medicine price rises of 12.5% for and 5% for The team expects this growth trend to continue, albeit at a slower rate. Figure 21: Brazil average monthly PPP spend on medicines since Figure 22: China average monthly PPP spend on medicines since Average monthly spend PPP (meds) Average monthly spend PPP (meds) Age cohort Age cohort Increase in the proportion of people regularly purchasing medicines since In addition to understanding the amount spent on medication, it is also important to assess how many people are buying medicines regularly, which indicates access to pharmaceuticals. Figure 24 shows that the proportion of survey respondents regularly purchasing medicines in our EM universe increases with age. Interestingly, there is something of a disconnect between the amount spent on medicines (Figure 23) and the volume of medicines being bought by different age groups (Figure 24). While older respondents uniformly reported buying medicines more regularly, this did not translate into a higher amount being spent by this age cohort. This suggests that they are buying cheaper medicines in higher volumes. EM Consumer Survey

17 Figure 23: Amount being spent (PPP) on medicines by age group Medicine spend (PPP) Brazil China India Indonesia Russia Safrica Turkey Universe We have seen that the proportion of people regularly buying medicines in the older cohorts has been increasing since. Figure 24 also shows the proportional use of prescription medications in a developed market, Germany, split by the age groups in the EM survey, as well as three older age cohorts. Importantly, age cohorts not included in our survey account for over 7 of prescriptions in Germany. This suggests we could see even more dramatic increases in medication use in older cohorts not surveyed. Figure 24: Number of regular purchasers of medication increases with age in the EM Universe 5 3 % regular purchasers of medicines 45% 4 35% 3 25% 2 15% 1 5% >85 25% 2 15% 1 5% % of total defined daily dose (DDD) by age % DDD spend in Germany Notable increases in the proportion of respondents buying medicines regularly in Brazil, China and Mexico since A country-specific analysis shows that a larger proportion of respondents have started buying medicines regularly in Brazil and China since. There has been a large increase in the proportion of respondents from the oldest cohorts reporting that they regularly purchase medications, in particular. However, as noted above (Figure 22), the amount spent in China is higher in the younger age cohorts, suggesting that younger respondents in China are spending more on premium-priced products in lower volumes. In EM Consumer Survey

18 Mexico, the proportion of older respondents regularly buying medicines increased significantly this year. Conversely, in Indonesia and India the proportion of people buying medicines regularly has decreased across all age groups since. We ascribe this to potential differences in sampling and also a lack of affordability of medicines in these geographies for most respondents. Figure 25: Proportion of respondents regularly buying medicines since by age 8 % respondents who purchase medicines regularly Brazil China India Indonesia Mexico Russia Safrica Turkey EM Consumer Survey

19 Question 3: Attitudes towards local and international brands Younger, wealthier generation prepared to pay a premium While it is useful to understand trends in volumes of drugs bought and amounts being spent, it is also important to assess whether respondents are willing to pay extra for an international brand. We believe that this gives an indication of the conditions facing pharma companies in our coverage universe in these markets. As such, since we have asked respondents to our EM survey whether they would be willing to pay a premium for an international drug brand. Additionally, we have tried to understand if there is a correlation between a respondent's access to state-funded medicines and his/her willingness to pay a premium for international brands as well as the trust of local brands. We believe that these questions give an indication of the level of pricing power international pharmaceutical companies have in these markets. Respondents with higher levels of access to state-funded medicines are less likely to pay a premium for international brands In Figure 26 and Figure 27, we show snapshots for and of the correlation between willingness to pay a premium for an international branded medicine and access to state-funded medicines. In, there was a tight correlation between access to statefunded healthcare and willingness to pay a premium for an international brand. India had the least access and highest willingness to pay for a brand, while Brazil had the most access and least willingness to pay for a brand. Two exceptions to the trend were Indonesia, where relative income is low and therefore the affordability of premium products is decreased regardless of low state access, and Russia, where incomes are higher and consumers are more inclined to buy premium products regardless of the availability of state funded alternatives. In the trends remained fairly similar, except that more respondents in Brazil (+8pp) reported a willingness to pay for an international brand. The increase was proportional to the decrease in state-funded access and also correlated with a decrease in trust of local brands. Figure 26: Willingness to pay a premium for an international brand vs access to state-funded medicines () 10 Figure 27: Willingness to pay a premium for an international brand vs access to state-funded medicines () 10 Access to state funded medicine (%) Access to state funded medicine (%) Wouldn't be prepared to pay a premium for an international brand (%) Wouldn't be prepared to pay a premium for an international brand (%) Brazil China India Indonesia Mexico Russia S Africa Turkey Brazil China India Indonesia Mexico Russia S Africa Turkey EM Consumer Survey

20 Trust in local brands and willingness to pay a premium for international products appears stable for our EM universe as a whole While access to state-funded medicines is likely an important factor in respondents decision to pay a premium for international brands, we believe respondents perception of local brands is also important. We would expect lower trust of local brands to result in a greater willingness to pay a premium for an international brand. We find that respondents trust of local brands and their willingness to pay a premium for an international brand has remained fairly consistent over the past four years across our EM universe (Figure 28). From to, 63-67% of respondents indicated that they trusted local brands and 62-63% of respondents indicated that they were not willing to pay a premium for an international branded drug. This suggests a strong correlation between these factors. Respondents' willingness to pay a premium for international products increasing in Brazil and Turkey, decreasing in South Africa In, the countries where respondents reported being most willing to pay a premium for an international brand were China (37%), India (44%), Mexico (4) and Russia (45%). The reported level of willingness to pay a premium has been relatively stable since in these countries. However, an increased proportion of respondents have said they are willing to pay premiums for international branded products in Turkey (+7pp) and Brazil (+8pp) since. These trends correlate with a decrease in trust in local drug brands in Turkey (-12pp) and Brazil (-7pp) over the past four years. In Turkey, we saw a large increase in the proportion of respondents who reported that they doubted the safety of local products YoY (+8pp). Although the proportion of respondents in Brazil willing to spend a premium on an international product is increasing, it remained one of the countries in which people reported being least willing to pay a premium in. From our whole EM universe, respondents from Brazil (77%), Indonesia (77%) and South Africa (7) were the least willing to pay a premium for international brands. A large year-on-year increase (+9pp) in the proportion of South African respondents unwilling to pay a premium for an international product was noted. This correlated with a material increase in the level of trust of local drug brands (+7pp). This suggests that local brands are becoming more established and recognised as reputable suppliers by respondents. This also implies a potential decreased opportunity for pricing premiums by international pharmaceutical companies. Elsewhere, respondents trust of local branded medicines has rebounded in Indonesia and India following temporary decreases in. (In there was a vaccine scandal which would have likely caused the decrease in trust in Indonesia. Specifically, police uncovered a syndicate importing counterfeit vaccines which had been distributed to local healthcare providers over the previous 10 years.) EM Consumer Survey

21 Figure 28: Attitudes to local drugs and willingness to pay for international brands (excluding 'don t knows') % of respondents Brazil China India Indonesia Mexico Russia S Africa Turkey Universe Yes I trust local brands Doubt: safety Doubt: efficacy Doubt: safety and efficacy % not prepared to pay extra for interational brands Figure 29 and Figure 30 show and snapshots of the proportion of survey respondents expressing doubts about the safety/efficacy of local brands against their willingness to pay a premium for international brands. The figures also highlight the significant increase in doubts among survey respondents about the safety/efficacy of local products in Turkey and a corresponding increase in willingness to pay a premium for international brands. Figure 29: Proportion of respondents with doubts about the safety/efficacy of local brands vs. willingness to pay a premium for an international brand () Figure 30: Proportion of respondents with doubts about the safety/efficacy of local brands vs. willingness to pay a premium for an international brand () % willing to pay a premium for Int Brands Indonesia Mexico Brazil India Russia S.Africa China Turkey % willing to pay a premium for Int Brands Russia India Mexico China S.Africa Indonesia Brazil Turkey % with doubt in safety or efficacy of local brands % with doubt in safety or efficacy of local brands Willingness to pay a premium for international products is also dependent on income This year we have analysed the survey data to see if respondents from different income brackets and age cohorts reported any variation in the perceived trustworthiness of the safety and efficacy of local drug brands and willingness to pay a premium for international EM Consumer Survey

22 products (Figure 31 and Figure 32). Broadly speaking, respondents willingness to pay a premium for an international brand was correlated with their trust of local pharmaceutical brands and/or their income (i.e. ability to pay a premium for an international brand). Respondents from China and Russia reported the highest absolute income levels in our EM universe. Respondents from these countries were also most willing to pay a premium for an international brand. In China, the willingness to pay a premium for an international brand was correlated with respondents' reported income. The youngest respondents had the highest reported incomes and were the most willing to pay a premium for an international drug brand. The youngest respondents also reported a higher level of trust in local brands. This suggests that the youngest respondents were willing to buy premium international products due to increased purchasing power rather than a higher level of distrust in local brands. The willingness to spend more also appears to be translating into actual purchasing patterns, with the youngest respondents spending the most on medicines. Our analyst in China notes that the younger generation is more willing to pay a premium for quality and discretional healthcare services. Similarly, the youngest age cohorts in Russia were also the highest earners and most willing to pay a premium for an international brand. In Russia, the highest earners/youngest respondents had the lowest level of trust in local brands. These findings suggest that the youngest respondents would pay for an international product because they are both unsatisfied with the standard of local products and are more able to pay a premium for an international product due to their higher incomes. Elsewhere, in Indonesia, India and South Africa, there is a tight correlation between willingness to pay a premium for an international product and trust in local brands across age cohorts. In Indonesia and South Africa, trust in local brands is high and willingness to pay a premium for international brands is low. The South African healthcare system is split between public healthcare, which covers around 85% of the population, and private healthcare for the remainder. Private healthcare is typically restricted to higher earners due to its high cost (and we note that the price of insurance has been increasing considerably in recent years). The fact that the wealthier cohorts are less willing to pay a premium for international brands may reflect their already-high spending on healthcare and therefore a lack of willingness to spend any more. In Indonesia, lack of willingness to pay a premium for international brands may in part be due to the low average PPP income in the country. An important observation from the survey is that a larger proportion of younger respondents in many of the key EMs are more willing to pay a premium for an international product. This is particularly notable in China, Brazil, Mexico, Russia and South Africa. As noted, this correlates in some cases with trust in local brands and with income. Ultimately, we think the higher level of willingness of younger people to spend on international products could lead to a shift in overall consumer preferences in these countries over the longer term. EM Consumer Survey

23 Figure 31: Trust in local brands and willingness to pay a premium for an international brand by age % of respondents Brazil China India Indonesia Mexico Russia Safrica Turkey Country/age bracket Trust local medicine brands Wouldn't be prepared to pay a premium for an international brand Income (PPP) Income (PPP) Figure 32: Trust in local brands and willingness to pay a premium for an international brand by income % respondents who trust local brands < R$ 489 R$ R$ 1,141 R$ 1,142 - R$ 1,630 R$ 1,631 - R$ 3,260 R$ 3,261 - R$ 4,890 R$ 4,891 - R$ 6,520 R$ 6,521 - R$ 8,150 R$ 8,151 - R$ 11,410 >R$ 11,411 Under RMB 2000 RMB RMB RMB RMB RMB RMB RMB RMB Above RMB Up to 5000/- Rs to 7500/- Rs. 7501to 10000/- Rs to 15000/- Rs to 20000/- Rs to 30000/- Rs to 40000/- Rs to 50000/- More than Rs.50000/- <Rp 1,000,000 Rp 1,000,001 - Rp 1,500,000 Rp 1,500,001 - Rp 2,000,000 Rp 2,000,001 - Rp 3,000,000 Rp 3,000,001 - Rp 5,000,000 Rp 5,000,001 - Rp 7,500,000 Rp 7,500,001 - Rp 10,000,000 Rp 10,000,001 - Rp 15,000,000 >15,000,001 <$3,399 $3,400 - $8,500 $8,600 - $11,699 $11,700 - $14,699 $ $44,299 $44,300 - $107,000 >$107,000 <5000 RUBLES RUBLES RUBLES RUBLES RUBLES RUBLES RUBLES RUBLES > RUBLES < R500 R R 999 R R2 999 R R R R R R R R R R R R > R < TL TL TL TL TL > TL % respondents wlling to pay a premium Brazil China India Indonesia Mexico Russia Safrica Turkey Trust local brands Do not trust local brands Willing to pay a >2 premium for an international brand Willing to pay a premium for an international brand EM Consumer Survey

24 Country details Brazil Figure 33: % of monthly disposable income spend by category 3 25% 2 15% 1 Figure 34: Reported medicine access and perceptions of local vs. international brands % 2 1 Housing + Public Utilities Food Entertainment + Travel Autos Healthcare Education HPC + Clothing Savings % theoretical access to free drugs % actually 10 self pay % No premium for Int Brands % full trust in local brands In, the survey showed a sharp decrease in respondents' theoretical access to statefunded medication, while the share of respondents needing to self-pay increased over the same period. Respondents perception of local brands and their willingness to pay a premium for international brands remained largely flat year-on-year in. We attribute the decrease in state healthcare access in Brazil to decreased federal funding for the public healthcare system. In, federal funding for the healthcare system was reported to be at levels lower than those seen over a decade ago. This is a result of the Brazilian government running a significant fiscal deficit, resulting in global expenditure cuts as the economy has been in recession. Brazil's Health Minister has indicated that further potential cuts to public healthcare programmes are expected. Figure 35: Brazil GDP growth rates (%, yoy) 8 Quarterly GDP growth rates (yoy, %) Source: OECD data EM Consumer Survey

25 At the beginning of, Brazil s public healthcare system reached a critical status, with the government forced to inject in emergency funding into the system. These issues are likely to be compounded by the ongoing burden of the mosquito-transmitted diseases Zika and dengue. While Zika (c6,200 reported cases in ) has been a major concern in Brazil, the scale of the issue of dengue has been considerably higher (Figure 36). Over 1.5m people in Brazil were reported to have contracted dengue in, with the disease being a particular issue in rural and poorer regions. Controlling dengue outbreaks in the future will remain an important issue for the country to address. Ultimately, offsetting the healthcare burden of these transmissible diseases will depend on increased utility of vaccines, which should benefit Sanofi. Brazil launched a public immunisation programme for 500,000 individuals using Sanofi s Dengvaxia in H2-. Figure 36: Number of cases of key diseases in Source: Brazil MoH data International pharmaceutical companies in Brazil The Brazilian healthcare market has experienced significant growth over recent years. As such, it is one of the key EMs for a number of international pharmaceutical companies. Companies such as Sanofi have enjoyed growth in Brazil (Sanofi has seen mid/high-single digit growth in revenues in Brazil since ), although there has been mounting pressure from local pharmaceutical companies. These companies typically offer lower-cost alternative generic products. Brazil is a price-sensitive market, particularly given the economic issues noted above and the country s medicine pricing regulation. Despite this, international pharmaceutical companies leverage brand recognition in order to achieve price premiums in local markets. Sanofi remains the top international pharmaceutical company in the Brazilian market by sales (Figure 38), facilitated by its ownership of the formerly local independent drug company, Medley. Medley is considered to be one of the most recognisable medical brands in Brazil. Data from an independent survey suggests that the brand is also highly recognised by physicians and pharmacists. While IMS continues to highlight that medical expenditure in Brazil is expected to grow, albeit at slower rates going forward (7-1 CAGR between and 2021), the growing levels of unemployment (11.5%) and an economy in recession are likely to present additional challenges to higher-cost products. Ultimately, this may have an impact on premium-priced products such as those sold by international pharma companies. EM Consumer Survey